Income Effect


DEFINITION of 'Income Effect'

In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change will impact the quantity demanded of a good or service. The relationship between income and the quantity demanded is a positive one, as income increases, so does the quantity of goods and services demanded.


Loading the player...

BREAKING DOWN 'Income Effect'

For example, when an individual's income increases, other things remaining the same, that person will demand more goods and services; thus increasing their consumption. The degree to which a person or economy will spend more of their income on consumption is called the marginal propensity to consume (MPC). The MPC depends on the individual's or economy's saving characteristics.

  1. Marginal Propensity To Consume ...

    A component of Keynesian theory, MPC represents the proportion ...
  2. Economics

    A social science that studies how individuals, governments, firms ...
  3. Ceteris Paribus

    Latin phrase that translates approximately to "holding other ...
  4. Quantity Demanded

    A term used in economics to describe the total amount of goods ...
  5. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  6. Put-Call Parity

    A principle that defines the relationship between the price of ...
Related Articles
  1. Economics

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.
  2. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  3. Economics

    The Gini Index: Measuring Income Distribution

    A country with $100 billion in assets and four residents sounds good - unless three of them have $0.
  4. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Retirement

    Economic Indicators To Know

    The economy has a large impact on the market. Learn how to interpret the most important reports.
  6. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  7. Economics

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
  8. Economics

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  9. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  10. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  1. How do you calculate the income effect distinctly from the price effect?

    Economists calculate the income effect separately from the price effect by keeping real income constant in the calculation. ... Read Full Answer >>
  2. What's the difference between the income effect and the price effect?

    The price effect is the impact on the market based on how the consumer is spending money as a result of the income effect. ... Read Full Answer >>
  3. Is there a way to invest in the income effect?

    Investing in the income effect consists of investing in areas that are affected when an individual's income increases. The ... Read Full Answer >>
  4. What effect does the income effect have on my business?

    The income effect may have positive or negative consequences on a small business, depending on many factors. The income effect ... Read Full Answer >>
  5. What's the difference between the substitution effect and price effect?

    The substitution effect is caused solely by the change in price of a consumer item. The price effect relates directly to ... Read Full Answer >>
  6. What's the difference between the substitution effect and the income effect?

    The substitution effect refers to consumers spending money on items of lower value, while the income effect refers to how ... Read Full Answer >>
  7. Is finance an art or a science?

    The short answer to this question is "both". Finance, as a field of study and an area of business, definitely has strong ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!