what is the income effect 
the income effect in microeconomics is the resultant change in demand for a good or service caused by an increase or decrease in a consumer s purchasing power or real income as one s income grows the income effect predicts that people will begin to demand more and vice versa so called normal goods will exhibit this typical pattern inferior goods on the other hand may see their demand actually fall as income increases an example of such an inferior good could be store brand items as people become wealthier they may opt instead for more expensive name brands investopedia xiaojie liuunderstanding the income effectthe income effect is a part of consumer choice theory which relates preferences to consumption expenditures and consumer demand curves that expresses how changes in relative market prices and incomes impact consumption patterns for consumer goods and services for normal economic goods when real consumer income rises consumers will demand a greater quantity of goods for purchase the income effect and substitution effect are related economic concepts in consumer choice theory the income effect expresses the impact of changes in purchasing power on consumption while the substitution effect describes how a change in relative prices can change the pattern of consumption of related goods that can substitute for one another changes in real income can result from nominal income changes price changes or currency fluctuations when nominal income increases without any change to prices this means consumers can purchase more goods at the same price and for most goods consumers will demand more if all prices fall known as deflation and nominal income remains the same then consumers nominal income can purchase more goods and they will generally do so these are both relatively straightforward cases however in addition when the relative prices of different goods change then the purchasing power of consumer s income relative to each good changes then the income effect really comes into play the characteristics of the good impact whether the income effect results in a rise or fall in demand for the good 