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:
- First, determine the change in income (ΔI).
- Next, determine the marginal propensity to consume (MPC).
- Use the formula IE = ΔI * MPC to calculate the income effect.
- 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
