What is income effect? When is income effect positive or negative

Answer :

A change in demand on account of change in real income resulting from the change in the price of a commodity is known as income effect.

For example, A consumer buys 1 kg apples at Rs.20, now if the price of apples falls to Rs.15 and still he buys 1 kg apples, he is saving Rs. 5.It means his real income (in terms of apples) has increased. The consumer may use this increased real income (i.e. Rs. 5 saved in purchasing the original quantity of apples at a lower price) in purchasing more apples.

Price - falls , real income - rises , Quantity demanded - rises

Income effect is positive when increase in income cause increase in demand.It occurs in case of normal goods.

Income effect is negative when increase in income cause decrease in demand. It occurs in case of inferior goods.

Also read : Law of demand