Example of income effect. For example, if a household spends one quarter of its income on rice, a 40% decline in rice prices will increase the household’s disposable income, which they can spend in purchasing either more rice or something else. Spending more on something else is known as the substitution effect.What is the definition of income effect?
income effect. A change in the demand of a good or service, induced by a change in the consumers' discretionary income. Any increase or decrease in price correspondingly decreases or increases consumers' discretionary income which, in turn, causes a lower or higher demand for the same or some other good or service.What describes the income effect?
The income effect might look at how personal spending is impacted by the quantity of an item offered in a single package. The income effect describes how spending on consumer goods, like T-shirts, changes. The income effect may look at how the availability of credit cards impacts personal spending habits.