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As far as I understand:

Ordinary income effect: A change in the price of good 1 will affect my future behaviour (the quantities that I will buy of good 1 and good 2). But it doesn't really affect my current position (I still have the same income to spend).

Endowment income effect: A change in the price of good 1 will affect my current position as it will be that my endowment (the initial bundle that I have) will lose most of its value. So in some way its as if a decrease in the price of good 1 had a direct impact on my income. (Depending if the individual is a supplier or a buyer of good 1 a decrease in its price might make him better or worse of)

Is my understanding of both of these terms correct?

Thank you very much in advance for your help

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  • $\begingroup$ "A change in the price of good 1 will affect my future behaviour (the quantities that I will buy of good 1 and good 2). But it doesn't really affect my current position (I still have the same income to spend)." Why doesn't it affect your current position? If the price of gas rose to \$5000 a gallon, would you ever drive a car? $\endgroup$ – Giskard Feb 18 at 18:48

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