Economics 101: Income Effect | SterlingTerrell.net

Economics 101: Income Effect

What is the income effect?

The Income Effect is a change in consumption when a customers preferences move to a higher or lower indifference curve.

For example:

Last year I was indifferent between taking a vacation or buying a new car.

But this year, my income doubled.

Now I am indifferent between taking three vacations or buying two new cars.