tulovaikutuksen

The term "tulovaikutus" is a Finnish word that translates to "income effect" in English. It is a concept used in economics to describe how a change in the price of a good or service affects the purchasing power of a consumer's income. When the price of a good falls, consumers can afford to buy more of it with the same amount of money, effectively increasing their real income. Conversely, if the price rises, their real income decreases, limiting their purchasing power.

The income effect is one of two components that explain how changes in price influence the quantity demanded of a good, the other being the substitution effect. The substitution effect explains how consumers will switch to relatively cheaper substitutes when the price of a good increases. The income effect, however, focuses purely on the change in purchasing power.

For normal goods, a decrease in price leads to an increase in quantity demanded due to both the income and substitution effects. For inferior goods, a decrease in price leads to a decrease in quantity demanded as the increase in real income causes consumers to switch to higher-quality alternatives. The magnitude of the income effect can vary depending on the proportion of income spent on the good and the elasticity of demand. Understanding the income effect is crucial for analyzing consumer behavior and predicting market responses to price changes.