What does the income effect describe?

The income effect describes how a change in a consumer's income influences their purchasing behavior, particularly regarding the quantity of goods consumed. When a consumer's income changes, their overall purchasing power changes as well. If their income increases, they may buy more of certain goods; if it decreases, they might buy less. Specifically, this effect is often discussed in the context of price changes for goods.

In the context of a price decrease for a product, the consumer can effectively afford to buy more of that product with their existing income, thereby increasing their quantity consumed. Conversely, if the price increases, their purchasing power decreases, and they might reduce consumption of that good.

Thus, the income effect captures the relationship between changes in income (or changes in prices that affect real income) and the quantity consumed, which is why it is tied specifically to changes that impact financial capacity and consumer choices.