Income effect

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The income effect is the increased demand for a good when its price decreases, due to the consumer having more cash (more real income) from the price decrease. The consumer then has more money to spend when the price of the good declines, and he uses some of that extra money to buy more of the good. This effect is larger for goods that consumers depend heavily upon, such as certain foods and gasoline.

The income effect is one reason why the demand curve slopes downward.

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