The Income Effect

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The income effect refers to the increase in a consumer’s purchasing power when the price of a product decreases. Even though a consumer’s actual income does not change, a reduction in the price of a product leaves consumers with more money after the purchase of the product compared to the amount of money left when the product was more expensive. One of the things consumers might do with their increased purchasing power is buy more of this product.

Hamburger Example of the Income Effect
Suppose you have $5 in your pocket. If you go to McDonald's and Big Macs cost $3, then if you buy one Big Mac for lunch, you would have $2 left.
With that same $5 in your pocket, suppose you go to McDonald's and find Big Macs on sale for $1. If you buy one Big Mac for lunch, you now have $4 left. One of the things you might do with the “extra” money is buy another Big Mac.
In both of these cases, your monetary income is the same ($5). You have more purchasing power in the second case, however.