How are equilibrium price and quantity affected when income of the consumers (a) increase? (b) decrease?

Exercises · Q9

Q. How are equilibrium price and quantity affected when income of the consumers

(a) increase?

(b) decrease?

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Concept understanding — Supply And Demand Shift

The Everyday Intuition: Why Did My Chai Cost More Last Month?

Think about the chai-wala near your school. One month, a sudden cold wave hits your city. Everyone wants hot chai. The chai-wala can only make so many cups per hour. What happens? He might raise the price from ₹10 to ₹12. You grumble, but you still buy it because you're cold. That's demand shifting — more people wanting chai at every price.

Now imagine a different scenario: a truckers' strike makes milk and sugar expensive to transport. The chai-wala now has to pay more for his ingredients. He can't afford to sell chai at ₹10 anymore. He raises the price to ₹12 just to cover his costs. That's supply shifting — the cost of making chai has changed.

These two stories feel similar — price goes up in both — but the reason is completely different. And that difference is the entire point of this concept.

The Precise Meaning: What "Shift" Actually Means

In economics, demand and supply are not single numbers. They are schedules — a whole list showing how much buyers want (or sellers offer) at every possible price. We draw them as curves on a graph: price on the vertical axis, quantity on the horizontal.

A shift means the entire curve moves — left or right. This is different from a movement along the curve, which happens when only the price changes.

Important

Shift of the curve = a non-price factor changes (income, tastes, input costs, technology).

Movement along the curve = only the price changes.

Demand Shift

The demand curve shows: "At price ₹P, buyers want quantity Q." If something other than price changes how much people want, the whole curve shifts.

Rightward shift (increase in demand): At every price, buyers want more than before.

Leftward shift (decrease in demand): At every price, buyers want less.

What causes a demand shift? NCERT Class 12 (Introductory Microeconomics, Chapter 5) lists these factors:

Change in income: For normal goods, higher income → more demand at every price. For inferior goods (like cheap noodles), higher income → less demand.
Change in tastes/preferences: A health report praising green tea shifts its demand curve right.
Change in price of related goods:
- Substitutes (tea and coffee): If coffee becomes expensive, tea demand shifts right.
- Complements (petrol and cars): If petrol becomes expensive, car demand shifts left.
Expectations about future prices: If you think chai will cost ₹15 next week, you buy more today — demand shifts right now.
Number of buyers: More population → more demand at every price.

Supply Shift

The supply curve shows: "At price ₹P, sellers offer quantity Q." If something other than price changes their willingness or ability to sell, the whole curve shifts.

Rightward shift (increase in supply): At every price, sellers offer more.

Leftward shift (decrease in supply): At every price, sellers offer less.

NCERT lists these causes:

Change in input prices: Cheaper raw materials → supply shifts right. Costlier inputs → supply shifts left.
Change in technology: Better machines → produce more at same cost → supply shifts right.
Change in price of other goods (for multi-product firms): If a farmer can grow wheat or rice, and wheat price rises, they shift land to wheat — rice supply shifts left.
Expectations: If sellers expect higher prices next month, they may hold back stock today — supply shifts left.
Number of sellers: More firms enter the market → supply shifts right.
Taxes and subsidies: A tax on production shifts supply left (costs rise). A subsidy shifts supply right (costs fall).

Why It Matters: The New Equilibrium

The market price is determined where demand and supply curves intersect. That intersection is called equilibrium. When a curve shifts, the equilibrium changes.

Here is what happens in words (and you should draw this):

Case 1: Demand shifts right (increase in demand)

At the old price, there is now excess demand — buyers want more than sellers offer.
Sellers raise price. As price rises, some buyers drop out, and sellers produce more.
New equilibrium: Higher price, higher quantity. …

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Changes in consumer income shift the demand curve, leading to new equilibrium prices and quantities depending on whether the good is normal or inferior.

Understanding how equilibrium price and quantity are affected by changes in consumer income requires us to first grasp the concepts of market equilibrium and the determinants of demand. Market equilibrium occurs at the intersection of the supply and demand curves, where the quantity demanded equals the quantity supplied, determining the equilibrium price ( $P^*$ ) and equilibrium quantity ( $Q^*$ ).

Consumer income is a crucial determinant of demand. When income changes, it causes the entire demand curve to shift, rather than just a movement along the curve. The direction of this shift depends on the type of good:

Normal Goods: For most goods and services, an increase in consumer income leads to an increase in demand. Conversely, a decrease in income leads to a decrease in demand. Examples include branded clothing, restaurant meals, or new cars.
Inferior Goods: For some goods, an increase in consumer income leads to a decrease in demand. This happens because consumers can now afford better alternatives. Conversely, a decrease in income leads to an increase in demand for these goods. Examples might include cheaper public transport (if one can now afford a car), or certain generic brands of food.

In both scenarios below, we assume that the supply curve remains constant, as the change in consumer income directly affects only the demand side of the market.

(a) When income of the consumers increases

When consumer income increases, the demand curve shifts. The impact on equilibrium price and quantity depends on whether the good is normal or inferior.

For Normal Goods:
- An increase in consumer income leads to an increase in demand for normal goods. Consumers are willing and able to buy more at every given price.
- Graphically, the demand curve shifts to the right.
- With an unchanged supply curve, this rightward shift in demand creates a temporary shortage at the original equilibrium price. This upward pressure on prices causes both the equilibrium price and the equilibrium quantity to rise.
- The market moves to a new equilibrium point where both the equilibrium price is higher and the equilibrium quantity is higher.
For Inferior Goods:
- An increase in consumer income leads to a decrease in demand for inferior goods. Consumers substitute away from these goods towards more preferred, higher-quality alternatives.
- Graphically, the demand curve shifts to the left.
- With an unchanged supply curve, this leftward shift in demand creates a temporary surplus at the original equilibrium price. This downward pressure on prices causes both the equilibrium price and the equilibrium quantity to fall.
- The market moves to a new equilibrium point where both the equilibrium price is lower and the equilibrium quantity is lower.

(b) When income of the consumers decreases

When consumer income decreases, the demand curve again shifts, with the impact depending on the type of good.

For Normal Goods:
- A decrease in consumer income leads to a decrease in demand for normal goods. Consumers are less willing and able to buy these goods at every given price.
- Graphically, the demand curve shifts to the left. …

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Q.How are equilibrium price and quantity affected when income of the consumers

(a) When income of the consumers increases

(b) When income of the consumers decreases

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