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Which phrase describes the income effect?

A. The effect of demand and supply on income earned by producers.
B. The impact of price on consumers' purchasing ability and decisions.
C. The increased income earned by suppliers because of high prices.
D. The impact of consumers' income on the supply of a product.



Answer :

GinnyAnswer

Final answer:

The income effect explains how price changes affect consumer behavior and purchasing power.


Explanation:

The income effect in economics refers to the impact of a price change on a consumer's purchasing power and decisions. When the price of a good decreases, a consumer's ability to buy goods increases, leading to a higher quantity demanded.

The income effect is part of consumer choice theory and influences how changes in prices affect consumer behavior. It is crucial in understanding how individuals respond to alterations in prices and their purchasing patterns.

Normal goods demonstrate the income effect, where a decrease in price enhances a consumer's buying power, resulting in an increase in the quantity of the good demanded.


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