|
|
PLANNED INVESTMENT: Investment expenditures that the business sector intends to undertake based on expected economic conditions, interest rates, sales, and profitability. This is a critical component of Keynesian economics and the analysis of macroeconomic equilibrium, which occurs when actual investment is equal to planned investment. The difference between planned and actual investment is unplanned investment, which is inventory changes caused by a difference between aggregate expenditures and aggregate output. Should actual and planned investment differ, then aggregate expenditures are not equal to aggregate output, and the macroeconomy is not in equilibrium.
Visit the GLOSS*arama
|
|
|
|
                           INCOME EFFECT: The change in quantity demanded that results because a change in the demand price of a good affects real income (that is, the purchasing power of income) even though nominal income remains the same. This is one of two reasons, or effects, underlying the law of demand and the negative slope of the market demand curve. The other is the substitution effect. The income effect offers part of an explanation for the law of demand and the negative slope of the demand curve. It rests on the observation that a change in price affects the purchasing power of a given amount of income. If the price rises, then the purchasing power of income falls. If the price falls, then the purchasing power of income rises.How It Works?Purchasing power, in general, is the quantity of goods and services that can be purchased with a given amount of income. To illustrate purchasing power, consider the morning consumption habit of Duncan Thurly. Duncan buys two glazed donuts from his local bakery, Donuts Dough-Lites, for 50 cents each on his way to work every morning. To satisfy this somewhat unhealthy practice, Duncan always enters the bakery with a single dollar.However, consider what happens if Duncan enters the Donuts Dough-Lites bakery one morning to discover that the price of glazed donuts has fallen to 25 cents each? Duncan's dollar has greater purchasing power at the lower price. He can now purchase four glazed donuts if he desires, which he probably will. If Duncan gives in to the greater purchasing power of his dollar and purchases four tasty glazed donuts, then he has fallen victim to the income effect. Up and DownConsider the income effect from both sides of a price change.- Higher Price: An increase in price causes a decrease in the purchasing power of income. This restricts the ability to purchase a good and the quantity demanded decreases.
- Lower Price: A decrease in price causes an increase in the purchasing power of income. This enhances the ability to purchase a good and the quantity demanded increases.
Not A DeterminantThe income effect is triggered by a change in demand price, given that buyers' income is constant. This effect needs to be distinguished from a seemingly similar notion, the buyers' income demand determinant.- Income Effect: The income effect results from a change in demand price, which affects the purchasing power of a given amount of income. The change in purchasing power then causes a change in quantity demanded and a movement along the demand curve. With the income effect, price changes and income is fixed.
- Buyers' Income Demand Determinant: Buyers' income is a demand determinant that affects the ability to purchase a good, given no change in the price of the good. The change in buyers' income causes a change in demand and a shift of the demand curve. With the buyers' income demand determinant, price is fixed and income changes.
The Substitution EffectThe income effect is one of two effects underlying the law of demand and negative slope of the demand curve. The other is the substitution effect, which results because a change in price changes the relative prices of other goods and induces buyers to substitute the purchase of one good for another. While both effects are important, for most goods, the substitution effects tends to play the biggest role in a change in quantity demanded.
Recommended Citation:INCOME EFFECT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: November 15, 2025].
Check Out These Related Terms... | | | | | | | | | |
Or For A Little Background... | | | | | | | | | | | | | | |
And For Further Study... | | | | | | | |
Search Again?
Back to the WEB*pedia
|
|
|
BLUE PLACIDOLA
[What's This?]
Today, you are likely to spend a great deal of time flipping through mail order catalogs hoping to buy either a coffee table shaped like the state of Florida or storage boxes for your summer clothes. Be on the lookout for deranged pelicans.
Your Complete Scope
This isn't me! What am I?
|
|
|
Junk bonds are so called because they have a better than 50% chance of default, carrying a Standard & Poor's rating of CC or lower.
|
|
|
"Do something wonderful; people may imitate it. " -- Albert Schweitzer, theologian, physician
|
|
NTB
Non-Tariff Barrier
|
|
|
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.
User Feedback
|
|
