Economics – The allocation of resources - Price changes | e-Consult
The allocation of resources - Price changes (1 questions)
Login to see all questions.
Click on a question to view the answer
Answer:
Diagram:
A demand and supply diagram should be drawn. The diagram should clearly label the axes (Price on the vertical axis, Quantity on the horizontal axis). The demand curve should be downward sloping (D), and the supply curve should be upward sloping (S). A point where the D and S curves intersect represents the equilibrium price (Pe) and equilibrium quantity (Qe).
Explanation:
- Increase in Consumer Income: An increase in consumer income generally leads to an increase in the demand for normal goods. This causes the demand curve to shift to the right (D1 to D2).
- New Equilibrium: The rightward shift in the demand curve results in a new equilibrium point where the demand curve (D2) intersects the supply curve (S). This new equilibrium will have a higher equilibrium price (P2) and a higher equilibrium quantity (Q2) compared to the original equilibrium (Pe and Qe).
- Impact on Price and Quantity: The price of the good increases, and the quantity bought and sold also increases. This is because consumers are now willing and able to buy more of the good at the higher price.
- Normal Goods: This explanation assumes the good is a normal good. The demand for inferior goods (e.g., cheap instant noodles) may not increase with an increase in income.