Wealth effect

Definition

Wealth effect refers to a situation where the wealth or purchasing power of a party to an economic transaction significantly distorts that person's reservation price compared to that person's private cost (in case of a seller) or that person's private benefit (in case of a buyer).

Examples

Poor buyer

The classic example of this is a person with very little money who is unable to purchase a basic amount of food even though the private benefit the person receives from the food is high.

Poor seller

The example is a person desperate for food to survive who is willing to sell labor at a lower price than the private cost to the person of performing that labor.