Question

For each situation below, state whether it is an example of the income effect changing quantity demanded or an example of a change in income shifting demand.
a. The mean income in Detroit rises and people purchase more homes. _______________
b. The price of frozen pizza decreases, making frozen pizza more popular among college students. ______________
c. A recession forces many people out of work and more people purchase ramen noodles than before. ____________
d. An increase in the price of game consoles decreases sales, as fewer people can afford them. _______________

Answer 1

The following are examples of the the income effect changing quantity demanded :

1. The price of frozen pizza decreases, making frozen pizza more popular among college students.
2. An increase in the price of game consoles decreases sales, as fewer people can afford them

The following are examples of a change in income shifting demand:

1. The mean income in Detroit rises and people purchase more homes.
2. A recession forces many people out of work and more people purchase ramen noodles than before.

The income effect leading to a change in quantity demanded arises when a change in the price of the good changes. Here purchasing power changes yet money income remains constant. The income effect leads to movement among the demand curve for the good.

A change in income that leads to a shift in demand occurs when there is a change in income leading to either an outward or inward shift of the demand curve.

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