Income effect is basically the effect on consumer equilibrium if the consumer income varies while price of commodity X sugar and Y oil remains unchanged. OR Income effect is the impact on consumer equilibrium and variations in consumer income while the prices of commodities remaining the same.
The behavior of the consumer who are the one to decide with regards to select, purchase and then consumption of goods as well as services for the satisfaction of their needs and want is known as consumer behavior. The cardinal approach is focused on consumer view on utility.
Alfred Marshall defines economics as “the study of mankind in ordinary business of life”, it is clear from the above definition that it does not study who lives aloof in some desert or jungle, but a man who lives in society. Even in society the man is not studied individually. Economics is concerned with the aggregate behavior of the message.
Various economists have different views about the subject matter of economics. Adam smith, in his book “An Inquiry into the nature and causes of Wealth of Nations" which was published in 1776 defined economics as an enquiry into the nature and causes of wealth of Nations in other words it lays importance on wealth rather than welfare of human beings.
Since the budget line is based on consumer income and prices of commodities, hence shifts in the budget line may occur due to change in income or change in price or both so there are two types of effects or shits in the budget line: 1. Effect of change in income 2. Effect of change in price
A budget line or budget constraint illustrates the alternative combinations of two different goods that can be purchased with a given income based on the prices of the two goods. Or budget line indicates the combination of commodities that a consumer can buy with a given income at a given set of prices
Define Stagflation through Diagram, In stagflation both the higher level of employment and inflation are attached. It is therefore, also called “Inflationary recession.” According to Keynesian stagflation occurs due to rise in cost of production or fall of supply. If the supply goes downward it will certainly affect the price level which will go higher.
The Keynesian theoretical consumption function, as elaborates by the post Keynesian economists likes James Tobin, Arthur Smithies is called the absolute theory of consumption. Consumption spending is the positive function of the absolute level of income that is, higher the level of current income, higher is the consumption demand and vice versa