Economics – The allocation of resources - The role of markets in allocating resources | e-Consult

A change in consumer income will impact the market for a good through its effect on demand.

Increase in Income (Normal Good): If consumer income increases, the demand curve for most goods will shift to the right. This is because consumers have more disposable income and are willing to purchase more of the good at each price level. The rightward shift in the demand curve leads to a higher equilibrium price and a higher equilibrium quantity. The increased demand puts upward pressure on prices, and sellers respond by increasing output.

Decrease in Income (Normal Good): If consumer income decreases, the demand curve will shift to the left. Consumers buy less of the good at each price level. This results in a lower equilibrium price and a lower equilibrium quantity. Sellers may reduce output and potentially lower prices to maintain sales.

Increase in Income (Inferior Good): For an inferior good (e.g., a cheaper brand of tea), an increase in income will lead to a decrease in demand. The demand curve shifts to the left, resulting in a lower equilibrium price and quantity. Consumers switch to higher-quality alternatives as their income rises.

Decrease in Income (Inferior Good): For an inferior good, a decrease in income will lead to an increase in demand. The demand curve shifts to the right, resulting in a higher equilibrium price and quantity. Consumers purchase more of the cheaper alternative as their income falls.