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How are equilibrium price and quantity affected when income of the consumers: (a) Increase, (b) Decrease

Answer» <html><body><p></p>Solution :(a) An increase in income of buyers will increase the demand (assuming <a href="https://interviewquestions.tuteehub.com/tag/normal-1123860" style="font-weight:bold;" target="_blank" title="Click to know more about NORMAL">NORMAL</a> goods) at the given price. It will lead to excess demand. This leads to competition among buyers, which raises the price. Increase in price leads to <a href="https://interviewquestions.tuteehub.com/tag/rise-1189674" style="font-weight:bold;" target="_blank" title="Click to know more about RISE">RISE</a> in supply and fall in demand. These <a href="https://interviewquestions.tuteehub.com/tag/changes-913881" style="font-weight:bold;" target="_blank" title="Click to know more about CHANGES">CHANGES</a> continue till supply and demand become <a href="https://interviewquestions.tuteehub.com/tag/equal-446400" style="font-weight:bold;" target="_blank" title="Click to know more about EQUAL">EQUAL</a> at a new equilibrium price. As there is an increase in demand only, equilibrium price rises. <br/> (b) A <a href="https://interviewquestions.tuteehub.com/tag/decrease-946104" style="font-weight:bold;" target="_blank" title="Click to know more about DECREASE">DECREASE</a> in income will decrease the demand (assuming normal goods) at the given price. It will lead to excess supply. This leads to competition among sellers, which reduces the price. Fall in price leads to decrease in supply and rise in demand. These changes continue till supply and demand become equal at a new equilibrium price. As there is a decrease in demand only, both equilibrium price and equilibrium quantity will fall.</body></html>


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