Final answer:
The income effect describes the change in consumption as a result of the change in purchasing power rather than a change in actual income. For normal goods, this effect implies that consumption decreases when prices increase, aligning with the substitution effect. This contrasts with the concept of marginal utility, which refers to satisfaction gained from additional consumption.
Step-by-step explanation:
The income effect refers to a scenario where the buying power of a consumer's income changes due to a variation in price levels, although their actual income does not change. This effect typically occurs alongside the substitution effect, which is when consumers replace more expensive goods with less expensive alternatives due to relative price changes. When dealing with normal goods, if the price of these goods increases, consumers will feel as though their purchasing power has decreased, leading them to buy less of each good, which is demonstrated by the direction of the "i" (income effect) arrows in economic diagrams.
For normal goods, the income effect works in the same direction as the substitution effect because as goods become more expensive, not only will people substitute to a cheaper alternative, but they will also reduce their consumption due to reduced purchasing power. The impact of the income effect can thereby lead to less consumption of the affected goods. Unlike the income effect, the marginal utility is about the additional satisfaction gained from consuming an extra unit of a good or service.