Income Effect Can Be Negative Or Positive

Income effect is the effect a change in income has on the demand for a good.

Income effect can be negative or positive. The income effect may also refer to the effect of a change in taxes on people s consumption behavior in reaction to this effect. Normal good negative income effect. When the income effect of both the goods represented on the two axes of the figure is positive the income consumption curve icq will slope upward to the right as in fig. The term may also refer to the effect on real income when there is a change in the price of a good or service which also affects the amount of disposable income the effect can be positive or negative.

By the way we constructed them the substitution effect plus the income effect equals the total effect of the price change. The income effect is negative for those commodities which are considered inferior e g wheat maize jowar bajra cereals vegetable oils cotton clothes etc by the consumer. For example if a company has positive income in one year and negative income in the next year the company can use its negative income to offset its positive income. Income effect can either be positive or negative.

This is the normal good case. Normal goods are those whose demand increases as people s incomes and purchasing power rise. Positive income effect will mean if b earn more money he will buy more of good x. A normal good is defined as having an income elasticity of demand coefficient that is positive but less.

Ie is negative in case of inferior goods including giffen goods where we find inverse relationship between income and quantity demanded. For such commodities with the increase in income of the consumers the consumption of the commodity falls as the consumer starts substituting superior commodities for them. Thus an income effect is positive in case of normal goods. So the substitution effect is always negative as it will oppose the price change lower relative price means more demand vice versa but the income effect can go either way.

Alternative way of analyzing a price change. The company may have negative taxable income and receive tax refunds from the tax authority as a result. Income effect for a good is said to be positive when with the increase in income of the consumer his consumption of the good also increases.