The income effect is a consumer’s change in spending based on the change in their salary/income and prices of goods. If a consumer’s salary decreases, their spending will decrease. In addition to spending less, the consumer may look for inferior or substitute goods at a lower price. Overall, the net effect is less spending. Also, if a consumer’s salary remains the same but the cost of goods they frequently buy increases, the consumer will look for cheaper alternatives, thus decreasing their overall spending. The opposite effect holds, as well. When a consumer’s salary increases and prices remain the same, they will spend/buy more goods.
