question_answer

Explain how rise in income of a consumer affects the demand of a good. Give examples.

Answer:

The effect of increase in income of a consumer on the demand of a good depends on the type of the good. Normal Goods: The demand for normal goods share a positive relationship with a consumer?s income. That is, as income of the consumer increases, the demand for normal goods also increases. For example, shirt is a normal good. As the income of the consumer increases, the demand for shirts increases.

In the figure, initially at the price\[O{{P}_{1}}\], consumer is consuming\[O{{Q}_{1}}\] units of good. With an increase in the income of the consumer, the demand for the good increases and the demand curve shifts parallel outwards to D?D?. The consumer purchases more units of the good (\[O{{Q}_{2}}\]) at the same price\[O{{P}_{1}}\].

Inferior Goods and Giffen Goods: The demand for the inferior goods and the giffen goods share a negative relationship with a consumer's income. That is, as the income increases, the demand for these goods falls.

In the figure, initially at the price\[O{{P}_{1}}\], consumer is consuming\[O{{Q}_{1}}\] units of good. With an increase in the income of the consumer, the demand for the inferior good (or Giffen good) falls and the demand curve shifts parallel inwards to D?D?. The consumer purchases lesser units of the good (\[O{{Q}_{2}}\]) at the same price \[O{{P}_{1}}\].E.