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How is the equilibrium price and equilibrium quantity of a normal commodity affected by an increase in the income of its buyers? Explain with the help of a diagram. Or Explain the effect of increase in income of buyers of a normal' commodity on its equilibrium price. |
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Answer» Solution :As, we know 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 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. 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. But as given in the question 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)`. With new demand curve `D_(1)D_(1)` 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. 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 fexpansion in supply) from A toC. So, finally, equilibrium price rises from OP to `OP_(1)` and equilibrium quantity ALSO rises from OQ to `OQ_(1)` . Conclusion Due to increase in income of a buyer for normal goods, (i) Equilibrium price rises from OP to `QP_(1)`. (ii) Equilibrium quantity also rises from OQ to `OQ_(1)` . ` (##FM_M_ECO_XII_P1_C12_E02_043_S01.png" width="80%"> |
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