Question

What is meant by the income effect of a fall in the price of the commodity?

Explain how the income effect is responsible for the negative slope of the demand curve.

Answer 1

A change in demand due to change in real income resulting from change in the price of a commodity is known as the income effect. For example, a fall in the price of a commodity increases the real income, i.e., the purchasing power of the given money income increases. The consumer can now afford to buy more of the commodity with his given money income. Accordingly, demand for the commodity increases.