Name: Wage Determination in Market Equilibrium
Uploaded: 2019-07-19
Duration: 6 min 58 s
Description: Learn how supply and demand intersect to determine market prices. Understand shifts in equilibrium and what causes market imbalances in this insightful video.

Question

How are the equilibrium price and quantity affected when the income of the consumer's increases?

Accepted Answer

An increase in income of the consumers increases their purchasing power which leads to a rightward shift in the demand curve in the case of normal goods as shown below:

In the case of normal goods, equilibrium price and quantity both will rise because they vary directly with the consumer's income. In the figure given below, due to the rise in the consumer's income demand curve shifts towards the right as with more income consumers can buy more and due to more demand prices will also rise which will induce producers to increase the quantity.

In the figure given below prices are measured on the Y axis and quantity demanded and supplied on the X axis. The equilibrium price and quantity are OP and OQ respectively.

As the situation is given to us that consumer income rises, the demand curve will shift from DD to $D 1 D 1$ .

With the new demand curve $D 1 D 1$ , there is excess demand for AB at initial price OP because at price OP demand is PB and supply is PA.

Due to this excess demand, with the price rise 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 also(expansion in supply) from A to C. Hence the equilibrium price rises to OP $1$ and quantity to OQ $1$ .

Conclusion
Due to an increase in income of a buyer
for normal goods,
(a) Equilibrium price rises from OP to OP $1$ .
(b) Equilibrium quantity also rises from OQ to OQ $1 .$

How are the equilibrium price and quantity affected when the income of the consumer's increases?

Important Questions on Market Equilibrium

Learn and Prepare for any exam you want !