Here’s a question related to demand and supply in economics:
“How does an increase in consumer income impact the demand and supply equilibrium for a normal good? Provide an analysis of the effects on both the quantity demanded and the market price.” Answered this question plagiarism free
The correct answer and explanation is:
An increase in consumer income typically leads to an increase in demand for normal goods. A normal good is one where demand rises as income increases. The impact on the demand and supply equilibrium can be analyzed as follows:
1. Demand Side Effect:
When consumers’ incomes rise, they generally have more purchasing power. As a result, the quantity demanded for normal goods increases, shifting the demand curve to the right. This means that at every price level, consumers are now willing to purchase more of the good than before. For example, if consumers have more disposable income, they may be more likely to purchase items such as clothing, electronics, or dining out, which are typically considered normal goods.
2. Supply Side and Market Price Effect:
On the supply side, the increase in demand tends to push up the market price of the good. This occurs because, with higher demand, sellers can raise prices due to greater competition among consumers who now want to buy more. As the price rises, suppliers may also be motivated to increase the quantity supplied, as higher prices often signal the potential for higher profits.
In terms of the equilibrium point, the shift in the demand curve to the right results in a new intersection with the supply curve at a higher price and higher quantity. In other words, both the equilibrium price and the equilibrium quantity of the good increase. However, the magnitude of this change depends on the responsiveness of supply. If supply is relatively inelastic (i.e., it cannot quickly increase production), the price increase may be more significant. Conversely, if supply is elastic (i.e., producers can increase production without much difficulty), the increase in quantity supplied may mitigate the price rise.
Conclusion:
In summary, an increase in consumer income leads to an increase in demand for normal goods. This shift in demand raises both the equilibrium price and quantity. The supply side may also respond, but the extent of the price increase depends on the elasticity of supply.