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

Law of Demand

The law of demand states that other thing remaining equal, the quantity demanded of a commodity increases when its price falls and decreases when its price rises.

The law indicates an inverse relationship between the price and quantity demanded of a commodity.

The law of demand is based on the following main assumptions:

1) There should be no change in income of the consumer.

2) There should be no change in tastes and preferences of the consumers.

3) Prices of the related commodities should remain unchanged.

4) Size of the population should not change.

5) The distribution of income should not change.

6) The commodity should be a normal commodity.

Explanation of law of demand/Why demand curve slope downwards to the right/why demand curve has a negative slope

1) Law of diminishing marginal utility : 

This law states that as consumption of a commodity increases, the utility from each successive unit goes on diminishing. So for every additional unit to be purchase the consumer is willing to pay less and less price.
Thus more is purchase only when own price of the commodity falls.

Explanation through example:

Units of shirt	Marginal utility
1 2 3 4 5	700 650 600 500 350