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How will an increase in the income of buyers of an inferior goods', affect its equilibrium price and equilibrium quantity? Explain with the help of a diagram. |
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Answer» Solution :As we know inferior goods are those whose QUANTITY demanded varies inversely with the change in income. As given in the examination problemn if income of a consumer increases and good consumed is inferior good, equilibrium price and equilibrium quantity both fall. It can be shown with the help of the following figure. In the given figure price of inferior 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. But as given in the examination problem when income of a consumer increases, the demand of inferior goods also falls SHIFTING the demand curve to the left from DD to ` D_(1)D_(1)` With new demand curve `D_(1)D_(1)` there 1S 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. DUE to this excess supply, competition among the producer the price fall. 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 increase in income of BUYER for inferior goods, (i) Equilibrium price falls from OP too OP. (ii) Equilibrium quantity also falls from OQ to `OQ_(1)`. ` (##FM_M_ECO_XII_P1_C12_E02_045_S01.png" width="80%"> |
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