What is meant by the income-effect? Give an example of an exception to the law.

The income effect refers to the change in the quantity demanded of a good or service, resulting from a change in the consumer's income. When a consumer's income increases, they are generally able to purchase more goods and services, leading to an increase in the quantity demanded for normal goods. Conversely, a decrease in income would lead to a decrease in the quantity demanded for normal goods. However, this relationship may differ for inferior goods.

Consumers generally allocate their income to maximize their overall satisfaction or utility. As income increases, they can afford more goods and services, which in turn alters their consumption decisions. Depending on the goods in question, consumers may choose to purchase more or less of certain products. For normal goods, as a consumer's income increases, so does their demand for the good. For inferior goods, however, as a consumer's income increases, their demand for the good decreases.

An exception to the law of the income effect can be observed in the case of Giffen goods. A Giffen good is an inferior good whose demand increases as the price increases, seemingly defying the law of demand. This can happen when the income effect is strong enough to reverse the negative substitution effect, which is typically observed when a consumer shifts consumption away from a good whose price has increased. For instance, consider a scenario where a staple food (e.g., rice) is the primary source of sustenance for low-income households. If the price of rice increases significantly, the households may not have enough money to buy other, more expensive sources of food. In this case, they might respond to the price increase by purchasing even more rice, as it is still the most affordable option. Hence, we observe an increase in demand for rice despite the increase in price, which is an exception to the law.