Income Effect Price Change

Suppose when the consumer s income is m the price line is ab.

Income effect price change. In other words the relation between price and quantity demanded being inverse the substitution effect is negative. It means that as the price increases demand decreases. If the consumer s income increases he will be able to buy more x and y. The price line will move outwards parallel to itself be coming say cd.

The equilibrium position is r where ab touches indifference curve ic 1. Income effect refers to the change in the demand law of demand the law of demand states that the quantity demanded of a good shows an inverse relationship with the price of a good when other factors are held constant cetris peribus. For a good as a result of a change in the income of a consumer. The price effect indicates the way the consumer s purchases of good x change when its price changes a given his income tastes and preferences and the price of good y.

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.