Answer to Question #317582 in Microeconomics for amcee

Question

illustrate and explain how an increase in household income will affect the equilibrium price and quantity in the market for data in scenario 1

Answer 1

A decrease in consumer income causes a shift in the demand curve to the left: from position D to position D1 (Fig. 1). At the initial price P1 and the same volume of supply, there will be an excess of goods equal to Q1Q3, and commodity stocks will begin to grow. The price cannot continue to stay at the P1 level. As a result of producers' competition, "pressure" on it from above will begin, and it will begin to decline. As prices fall, producers will reduce output. Moving along the curve S from top to bottom, they will reach the point E2, where their plans again coincide with the plans of consumers. Point E2 will become the new equilibrium point.

If consumer incomes increase, this will cause a shift in the demand curve to the right: from position D to position D1 (Fig. 2). At the initial price P1 and the same volume of supply (Q1), there is a commodity deficit equal to Q1Q3. Increased demand will stimulate the growth of output, but at the same time, prices will also rise. As a result, a new equilibrium price (P2) and a new equilibrium output (Q2) will be established.