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How are equilibrium price and quantity affected when income of the consumers (i) Increase? (i) Decrease? |
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Answer» Solution :As,m 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 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 quantity is OQ. (c) But as given in the exmination problem when income of a consumer rises the demand of normal goods increases shifting the demand curve to the right from DD to `D_(1) D_(1)` . (d) With new demand curve `D_(1) D_(1)` . there is excess demand at iniial price 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 movementalong the demand curve (contraction in demand ) from B to C and SIMILARLY, there is supply curve (expansion in supply) from A to C. So, finally, equilibrium price rises from OP to `OP_(1)` , and equilibrium quantity also rises from OQ to `OQ_(1)` . Conclusion Due to increases 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)` . ` (##FM_M_ECO_XII_P1_C12_E01_005_S01.png" width="80%"> (ii)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 `D_(1) D_(1)` . (d)With new demand curve `D_(1) D_(1) `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 `OP_(1)`, and equilibrium quantity also falls from OQ to`OQ_(1)`. Conclusion Due to decrease in income of a buyer for normal goods, (a) Equilibrium price falls from OP to `OP_(1)` (b) Equilibrium quantity also falls from OQ to `OQ_(1)` . ` (##FM_M_ECO_XII_P1_C12_E01_005_S02.png" width="80%"> |
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