We usually don’t like change, but hey...sometimes it’s not so bad. Income changes = when income increases or decreases.
Income changes result in the “income effect,” which is how changes in income result in changes in buying behavior, and in the demand for goods.
For instance, a positive income change might mean we just increased our disposable income. With more fun money in our pockets, we’re likely to spend more money on “normal” goods...things like coffee, clothes, and luxury goods. With normal goods, demand for them goes up when income changes are positive. It’s normal to buy more of them when you can.
When income changes for the better, we’re also more likely to buy less inferior goods. With inferior goods, demand for them goes down with positive income changes. You might upgrade your bus commute to a car commute with higher income, which would make the bus an inferior good. Inferior goods become a thing of the past with enough positive income changes.
Related or Semi-related Video
Econ: What is Permanent Income?0 Views
And finance Allah shmoop What is permanent income Oh win
the lottery tap into a trust fund inherit the throne
of some obscure but enormously wealthy country achieved tenure at
some prestigious university Or maybe just get elected to the
U S Senate Those situations cover one concept of a
permanent income income that will be coming in forever no
matter what you do In economics though the concept is
more particular It's used to explain consumer spending patterns called
the permanent income hypothesis The model assumes that a person
will spend money according to what they think they're long
term Average income will be In other words people get
an idea in their head about how much they're likely
to make going forward like off into the way distant
future And that expectation then drives their spending activity So
you're an economist we know dare to dream But you're
not just a run of the mill On the one
hand and on the other hand type of economists you're
a very confident economist Brash brazen impertinence You just graduated
last in your class from Jacksonville Online Economic Technical Institute
and Culinary Academy I'll steal You are one hundred percent
without a doubt Definitely convinced you're one day going to
win that million dollar Nobel Prize in economics You're positive
you're gonna win that dough someday Yeah So by permanent
income theory you count that number in your permanent income
Well you're twenty three now fresh out of Jackie Con
tech and cool average life spans about seventy nine years
That gives you about fifty six years to go divide
a million bucks by fifty six And that's Ah seventeen
grand dish extra that you Khun spend each year Well
you'll have to borrow the money for now at least
until you get a call from Sweden Another example You
work in a factory that makes leashes and collars They're
for pet ducks You make fifty grand a year Is
a quality control inspector in the RND department You spend
your days out back by the scientifically designed man made
lake leading ducks along with the experimental leashes You assume
you'll keep this basic salary for the foreseeable future Well
under the permanent income hypothesis is you've assumed a permanent
income is fifty grand You'll spend up to that level
but not beyond that level Now you get some weird
news You're eccentric Uncle decides he wants to give away
his worldly belongings and move to a Buddhist commune in
Mongolia Your share Five grand Okay so this particular year
you brought in fifty five thousand right You've got your
usual fifty grand for your job the ducklings factory and
an additional one time bonus amount of five grand from
your uncle Well someone supporting the permanent income hypothesis would
expect you to save the five grand from your uncle
You know the five thousand dollars a one time bonus
Your uncle has moved to the Buddhist com unit Doesn't
have any more money to give away You don't have
any other sickly or weird uncles Point is the five
grand gift is not likely to repeat your perception of
your long term permanent income has not changed You still
expect to earn fifty grand a year long term So
you socked away the five grand you know for a
rainy day Okay well then next year comes along and
you get a promotion You're now head of the duck
collar quality control department Your salary rises to eighty five
thousand dollars and your expectations rise as well You assume
you'll be head of the department or better forever least
for the foreseeable future You don't say the additional thirty
five grand in salary You're happy to spend it You
trade in your Yaris that thing or Prius Maybe for
a Cadillac and you skipped the five dollar wine rack
for stuff in the twenty dollar I'll your new assumed
permanent income has changed Now you perceive eighty five thousand
dollars as your permanent income or income level so you
spend it accordingly Then you buy a diamond collar for
your own pet duck Yeah maybe a little extravagant even
for an eighty five thousand dollars a year employee But
well you did get to use your employee discount so 00:03:50.93 --> [endTime] you know it's a bargain
Up Next
What is Disposable Personal Income? Disposable personal income is the amount of money people have to use after they’ve paid income taxes. This fi...
What are Income and Substitution Effects? Income effects reflects the increases or decreases in total consumption of goods and services in proporti...