Consumers’ choices are often affected by changes in their income. Increasing income allows the consumer to afford more goods. However, a decrease in income causes the consumer to buy fewer goods. This shifts the constraint on the consumer’s budget outward. If Jazmin’s income increases, she will increase her purchases of both goods.
The income effect of changing prices reflects that a price change is proportional to a change in demand for a good. For example, if the price of an apple drops by ten cents, Ms. Andrews will be able to buy more apples. Her income is the same as it was before, but she now has $50 less to spend than she did before.
The effect of changes in income on consumer choices can also be seen in what higher-income households buy. For example, a higher-income household will be less likely to buy a used car or a hamburger but more likely to buy a new one. A higher-income household might also buy a new car or eat more steak.
The effect of income changes on consumer choices is essential to understanding how consumers’ decisions are affected by the crisis and currency depreciation. The crisis has forced consumers to prioritize less expensive goods over more expensive goods. Furthermore, it makes people choose cheaper goods and avoid expensive brand products, which could lead to many businesses going under and reducing production levels.