Enter the change in income and the marginal propensity to consume into the calculator to determine the income effect on consumption.

## Income Effect Formula

The following formula is used to calculate the income effect:

IE = ΔI * MPC

Variables:

• IE is the income effect on consumption (currency)
• ΔI is the change in income (currency)
• MPC is the marginal propensity to consume (unitless)

To calculate the income effect, multiply the change in income by the marginal propensity to consume.

## What is the Income Effect?

The income effect is an economic concept that describes the change in an individual’s or economy’s consumption as a result of an increase or decrease in income. The marginal propensity to consume (MPC) is a measure of how much consumption will change with a change in income. A higher MPC means that a larger proportion of additional income will be spent, while a lower MPC indicates that more will be saved.

## How to Calculate the Income Effect?

The following steps outline how to calculate the Income Effect:

1. First, determine the change in income (ΔI).
2. Next, determine the marginal propensity to consume (MPC).
3. Use the formula IE = ΔI * MPC to calculate the income effect.
4. Finally, enter the values into the calculator to verify the result.

Example Problem:

Use the following variables as an example problem to test your knowledge.

Change in income (ΔI) = \$500

Marginal propensity to consume (MPC) = 0.75