Question

Explain the effect of an increase in the income of buyers of a normal commodity on its equilibrium price.

Answer 1

For a normal commodity, an increase in income of the consumers means an increase in its demand. Accordingly, the demand curve shifts rightward and both equilibrium price and equilibrium quantity tend to increase. In the given diagram, the actual demand curve DD and actual supply curve SS intersect at point E (i.e. equilibrium point). When the income of the buyer increases, the demand for normal goods also rises and the demand curve shifts rightward from DD to $D_1{D}_1$.

As a result, equilibrium price and quantity both are increased from OP to $O{P}_1$ and OQ to $O{Q}_1$