Effects of Changes in Income and Prices
Categories: Accounting, Company Management
Effects of changes in income and prices are known as the "income effect." If you're thinking "okay, the income effect makes sense for a change in income, but why do changes in price also fall under the income effect umbrella?"...it's because a change in price is a change in buying-power, just like income. If your income goes up, you can buy more chocolate. If chocolate goes on sale, you can buy more chocolate. The income effect is all about chocolate. Er...a change in buying-power.
When buying-power increases (whether from higher income or lower prices), people usually consume more stuff. They also usually consume better stuff, like better coffee, and maybe they buy a car rather than relying on the bus for transportation.
When buying-power decreases, either from a lower income or a rise in prices, the opposite happens: people cut back and buy less, and usually go with cheaper goods, like cheaper coffee and bussing, over more expensive alternatives.