Question -
Answer -
1. Increase in Income: When income increases, demand curve will shift to rightward in case of Normal good as shown below:
(a) As, we know normal goods are those whose quantity demanded varies positively with the change in income. As income of a consumer rises and goods consumed is normal goods equilibrium price and equilibrium quantity both rise. It can be shown with the help of the given figure.
(b) In the given figure, price of normal goods is measured on vertical axis and quantity demanded and supplied are measured on horizontal axis. Initially, the equilibrium price is OP and equilibrium quantity is OQ.
(c) But as given in the examination problem when income of a consumer rises the demand of normal goods increases shifting the demand curve to the right from DD to D1D1.
(d) With new demand curve DJDJ, there is excess demand at initial price OP because at price OP demand is PB and supply is PA; so there is excess demand of AB at price OP.
(e) Due to this excess demand, competition among the consumer will raise the price. With the rise in price there is upward movement along the demand curve (contraction in demand) from B to C and similarly, there is upward movement along the supply curve (expansion in supply) from A to C . So, finally, equilibrium price rises from OP to OPi; and equilibrium quantity also rises from OQ to OQr
Conclusion
Due to increase in income of a buyer
for normal goods,
(a) Equilibrium price rises from OP to OP1.
(b) Equilibrium quantity also rises from OQ to OQ1.
2. Decrease in income: When income decreases, demand curve will shift to leftward in case of Normal good as shown below:
(a) As we know that normal goods are those whose quantity demanded varies positively with the change in income. As given in the examination problem if income of a consumer falls and goods consumed is normal goods, then both equilibrium price and the equilibrium quantity fall. It can be shown with the help of the given figure.
(b) In the given figure price of normal goods is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis. Initially, the equilibrium price is OP and equilibrium quantity is OQ.
(c) But as given in the examination problem when income of a consumer falls the demand of normal goods also falls shifting the demand curve to the left from
DD to D1D1.
(d) With new demand curve D1D1 there is excess supply at initial price OP because at price OP demand is PB and supply is PA; so there is excess supply of AB at price OP.
(e) Due to this excess supply competition among the producer will fall the price. Due to fall in price there is downward movement along the demand curve (Expansion in demand) from B to C and similarly, there is downward movement along the supply curve (Contraction in supply) from A to C. So, finally, the equilibrium price falls from OP to OP1 and equilibrium quantity also falls from OQ to OQ1
Conclusion
Due to decrease in income of a buyer for normal goods,
- Equilibrium price falls from OP to OP1.
- Equilibrium quantity also falls from OQ to OQ1.