Explain the rule for determini
Answer:
The income effect: It is the change in demand for a good orservice caused by a change in a consumer’s purchasing powerresulting from a change in real income. This may happen if price ofgoods that consumer buys decreases. So consumer will be left withmore income.
If an individual is a buyer:
If the good is a normal good then increase in income willincrease its demand. Example- A brand new car. Hence there will bepositive sign. Income elasticty of demand will be positive.
Income elasticity of demand (Yed) : % change in quantitydemanded/% change in income
In this case, increase in income will increase demand.
If the good is a inferior good then increase in income willdecrease its demand. Example- A second hand car.
In this case, increase in income will decrease demand. Hencenegative sign.
If an individual is a seller:
If price increases then seller will supply more good. Hence, itwill have a positive sign due to law of supply. However, if a priceincrease is due to change in costs of raw material then sellerswill decrease supply and it will have a negative sign.
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