Wealth effect
In
economics, the
wealth effect is an increase in spending that accompanies an increase in
wealth (in absolute terms), or merely a perceived increase in wealth (in relative terms).
The effect includes the changes in the amounts and composition of
consumer consumption caused by changes in consumer
wealth. Economists believe people spend more when one of two things is true: when people actually
are richer (by objective measurement, for example, a bonus or a pay raise at work, which would be an
income effect), or when people perceive themselves to be "richer" (for example, the assessed value of their home increases, or a stock they own has gone up in price recently). Economists also believe that this situation has
macroeconomic implications. A typical response to the wealth effect includes a reduced supply of labor; however, personal income will still be increased. This can be seen by the parallel outward shift in the production function, which is indicative of the wealth effect. The effect's size is governed by a different calculation in either case:
*
Wealth elasticity of demand*
Income elasticity of demand*
The Wealth Effect
