Income Effect

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Marginal Propensity To Consume ...

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

    The consumption function is a mathematical formula laid out by ...
  3. Economics

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

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

    A term used in economics to describe the total amount of goods ...
  6. Premium to Surplus Ratio

    Net premiums written divided by policyholders’ surplus. The premium ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. 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.
  3. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  4. Active Trading Fundamentals

    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 roots in other scientific fields such as statistics and mathematics. Furthermore, ...
  5. Retirement

    Economic Indicators To Know

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

    What are the most common issues with Serial Correlation in stocks?

    Read about the concept of serial correlation in stock returns, and learn why market analysts are divided about the efficacy of trading based on stock patterns.
  7. Economics

    Can state and local governments in the US run fiscal deficits?

    Discover why most state and local governments do not – or cannot – run fiscal deficits in the same manner as the U.S. federal government.
  8. Bonds & Fixed Income

    How do I calculate yield to maturity of a zero coupon bond?

    Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than a bond with a coupon.
  9. Active Trading Fundamentals

    How do central bank decisions affect volatility?

    Using an aggregate, macroeconomic perspective, take a look at how some of the ways central bank decisions can impact market volatility.
  10. Fundamental Analysis

    What does the term 'invisible hand' refer to in the economy?

    Discover and understand the concept of the "invisible hand" as explained by Adam Smith, considered the founder of modern economic theory.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center