How are equilibrium price and quantity affected when income of the consumers (a) increase? (b) decrease?
When income of consumers increases, for a normal good, consumers are able to spend more money. The demand for the good increases at each price, resulting in a rightward shift of the market demand curve. This leads to an increase in both equilibrium price and equilibrium quantity. However, for an inferior good, consumers spend less with increase in income. The demand curve shifts leftward, leading to a decrease in both equilibrium price and equilibrium quantity.
When income of consumers decreases, for a normal good, consumers spend less. The demand curve shifts leftward, leading to a decrease in both equilibrium price and equilibrium quantity. For an inferior good, consumers spend more with decrease in income. The demand curve shifts rightward, causing both equilibrium price and quantity to increase.
Explanation
The textbook context explains that with an increase in income, consumers spend more on normal goods (like clothes), causing rightward shift in demand curve. For inferior goods, the opposite happens—consumers spend less when income increases. The supply curve remains unaffected by income changes. The equilibrium effects follow from demand shifts: rightward shift increases both price and quantity, while leftward shift decreases both.