Income Effect

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

The law of demand states that price and quantity demanded are inversely related, all other factors remaining constant.  Graphically, the law of demand is illustrated as a downward sloping demand curve.  There are two reasons for this inverse relationship between price and quantity demanded.  The first reason is known as the substitution effect and the second is known as the income effect.

When the price of a product decreases, it is as if the consumer's purchasing power increases because less total income is needed than before the price decrease to purchase the same quantity of products.  Consumers will use this additional income to purchase more of all normal goods and services, including the product whose price decreased.  When the price of a product increases, the reverse is true.

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