A budget constraint represents the various combinations of goods and services a consumer can purchase given their income and the prices of goods and services. It forms a crucial element in consumer choice theory within economics, illustrating the trade-offs consumers face as they allocate their limited resources among competing needs and wants.
In economics, the income effect refers to the change in purchasing power and quantity demanded of goods due to a change in consumers' real income resulting from a price change.
Income Elasticity of Demand measures the extent to which the demand for a good is affected by a change in income. High elasticity indicates luxury goods, while low elasticity points to necessities.
An inferior good is a type of product for which demand decreases as the income of the consumers rises, leading to a greater consumption of more expensive alternatives.
A normal good is a type of good for which demand increases as consumer income increases, holding all other factors constant. This inverse relationship between income and demand exemplifies how purchasing power influences consumer behavior.
