Question

Explain your understanding of how a price change (increase or decrease) changes your real income, using a relevant Example.

Answer 1

When the price increase and income level remains same, it decrease the real income.

Real income=income/price

This is because with increase in the price, the purchasing power of the consumer decreased and vice-versa in case of decrease in the price level.

For example if my income is currently $100.

If the current price of the apple is $10.

Then i can purchase 10(100/10) apples with this income.

But if my price of apple increase to $20,

Then now i can purchase only 5 apples. (100/20).

Hence change in the price affect my real income. Real income means income in terms of quantity of goods and services.

So with the change in the price, the purchasing power of goods and services changes.