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income that reflects its true purchasing power

contrast to money income or nominal income

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opposite directions

income effect

If people's income falls, the demand for an inferior good rises.

Inferior good: a good that its demand increases when income fall

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This calculates percent changes in prices and quantities based on the average of the initial and final values.

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Calculating the Price Elasticity of Demand

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Calculating the Price Elasticity of Demand

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percent change in quantity demanded to the percent change in price as we move
along the demand curve

(Change in quantity demanded/ initial quantity demanded) X 100

This equation represents the percent change in quantity demanded

(Change in Price/initial price)X100

This equation represents the percent change in price

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Income effect has no significant impact on individual consumption

-> Substitution effect make downward slope of demand curve

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change in the quantity of the good demanded that results from a change in the overall purchasing power of the consumer's income when the price of the good changes.

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change in the quantity of the good demanded that results from a change in the overall purchasing power of the consumer's income when the price of the good changes.

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It is a measure of the responsiveness of the quantity demanded to changes in the price.

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Income effect reinforces the substitution effect.

Example)
When the price of a good that absorbs a substantial share of income rises, the consumer becomes a bit poorer because their purchasing power falls.

-> Reduction in income leads to reduction in the quantity demanded and reinforces the substitution effect.