All the needs of the human being directly or indirectly depend upon income. we use that type of thing that we can manage with our income. So what is income, it is defined as money earned by people or government or company etc. over a time by doing some work or received from investment.
People spend their income on buying food, clothes and many things that they need but what happen when there is a change in income, how it affects the People's behaviour, how they make changes in their buying behaviour.
To measure the changes in people's consuming behaviour we use parameter call income effect, it is defined as the change in the demand of goods and services with respect to the change in income of the people.
There are Three Types of income effect
-Positive income effect
-zero income effect
- negative income effect
When people income increases the demand for normal goods also increases and this is called the positive income effect.
ex- luxury and comfort goods when people income more they buy more expensive and more comfortable goods which leads to the increase the demand of the goods.
When there is an increase in the people's income, the demand for cheaper things decreases and they shift to the costlier things and it is called negative income effect and that type of good is called inferior good.
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