What does the income effect describe?

The income effect describes the change in consumer behavior that occurs when there is a change in an individual's income. When a person's income increases or decreases, it can directly influence the amount of goods and services they can purchase. For example, if income rises, a consumer may feel more inclined to spend more on luxury items or increase their consumption of goods and services. Conversely, if income decreases, individuals might cut back on spending and opt for more basic goods or services.

This concept is crucial in understanding how shifts in economic conditions can affect overall demand for products and services within a market. It also highlights the connection between consumer purchasing power and their consumption choices, which is foundational for marketers looking to predict consumer behavior. Understanding the income effect allows businesses to tailor their pricing and marketing strategies to better align with the economic realities of their target audience.