The income effect in economics can be defined as the change in consumption resulting from a change in real income. This income change can come from one of two sources: from external sources, or from income being freed up (or soaked up) by a decrease (or increase) in the price of a good that money is being spent on. The effect of the former type of change in available income is depicted by the income - consumption curve discussed in the remainder of this article, while the effect of the freeing - up of existing income by a price drop is discussed along with its companion effect, the substitution effect, in the article on the latter.
a parallel shift in the budget line is caused by changes in the relative prices of the two goods
income effect