What is an Income Effect?

The income effect refers to the effect of a change in the price of a commodity on its demand when the currency income is unchanged. If the price of a certain commodity rises while the consumer's monetary income remains the same, it means that the actual income of the consumer is decreasing relative to the price increase of the commodity and the purchasing power is decreasing. Will decrease. Conversely, if the price of a certain commodity declines while the consumer's monetary income remains unchanged, it means that the actual income of the consumer is increasing relative to the decline in the price of the commodity, and the purchasing power is increasing. Demand will increase. This kind of phenomenon when the price of a certain commodity rises (falls) and causes real income to decrease (increase) causes demand to decrease (increase) is the income effect. ^[1]

Income effect

The income effect refers to the effect of a change in the price of a commodity on its demand when the currency income is unchanged. If the price of a certain commodity rises while the consumer's monetary income remains the same, it means that the actual income of the consumer is decreasing relative to the price increase of the commodity and the purchasing power is decreasing. Will decrease. Conversely, if the price of a certain commodity declines while the consumer's monetary income remains unchanged, it means that the actual income of the consumer is increasing relative to the decline in the price of the commodity, and the purchasing power is increasing. Demand will increase. This kind of phenomenon when the price of a certain commodity rises (falls) and causes real income to decrease (increase) causes demand to decrease (increase) is the income effect. ^[1]

The crux of the long-term downturn in China's consumption is not the common passion of ordinary people

Among the inbound tourists in China, Hong Kong compatriots account for the largest proportion, accounting for more than 60%, and foreigners account for only 10% or more. However, in the international tourism foreign exchange income, the proportion of foreigners is close to 50%, and Hong Kong compatriots are close to 30%. Among immigrants entering the country, Asia accounts for more than 60%, and Europe and the Americas account for about 20% and 10%, respectively. As can be seen from the structure of the first 15 major source countries,

People always want to spend less for the same items, because money is always scarce.

When you go to the market to buy fruit, when the price of oranges has dropped and the price of apples has not changed, what do you think? In the face of lowered oranges, apples seem to be more expensive, and you may buy more oranges instead of apples.

From this point of view, a change in the price of an item, such as a decrease in price, will have two effects on you: First, the price of the item will decrease, which is equivalent to your

Special substitution effects under Slutsky's decomposition:

1. In the case of complete complementation, the substitution effect is zero, and the total effect is the income effect.

2. In the case of complete replacement, the total effect is the replacement effect and the income effect is zero.

3. In the case of quasi-linear preference, the total effect is the substitution effect and the income effect is zero.