How are equilibrium price and quantity affected when income of the consumers (a) increases? (b) decreases?
How are equilibrium price and quantity affected when income of the consumers (a) increases?
(b) decreases?
1 Answers
When the good under consideration is a normal good:
I) On increase in income, the demand of the good also increases which results in rightward shift in the demand curve. Supply curve remaining unchanged, the equilibrium price and equilibrium quantity both rises.
II) On decrease in income, the demand of the good decreases which results in leftward shift in the demand curve. Supply curve remaining unchanged, the equilibrium price and equilibrium quantity both falls.
When good under consideration is an inferior good:
I) On increase in income, the demand of the good decreases which results in leftward shift in the demand curve. Supply curve remaining unchanged, the equilibrium quantity and equilibrium price both falls.
II) On decrease in income, the demand of the good increases which results in rightward shift in the demand curve. Supply curve remaining unchanged, the equilibrium quantity and equilibrium price both rises.