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Question
What is meant by the income effect of a fall in the prices of a commodity?
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Solution
A change in demand owing to change in real income arising from change in the price of a commodity is known as the income effect. For example, a decline in the price of a commodity improves the real income, i.e., the purchasing power of the given money income increases. The consumer can now afford to buy more of the commodity with his current salary. As a result, demand for the commodity increases.
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