Explain how do the following influence demand for a good:
i. Rise in income of the consumer.
ii. Fall in prices of the related goods
i. Rise in the Income of the Consumer
An increase in the consumer’s income has corresponding changes in the demand for different types of goods in the market. The effects of change in income on demand for different types of goods are as follows:
Normal goods are goods which have a positive relationship between income and quantity demanded. Assume that other things remaining constant, an increase in the consumer’s income will lead to an increase in the quantity demanded.
Inferior goods are goods which have a negative relationship between income and quantity demanded. Assume that other things remaining constant, an increase in the consumer’s income will lead to a decrease in the quantity demanded.
ii. Fall in Prices of the Related Goods
Substitute good: When the price of one good falls, it becomes cheaper in relation to another good. As a result, one good is substituted for the other good such as coffee and tea. Assume tea and coffee are two substitute goods. D1 is the demand curve for the demand of tea in diagram.
When there is a decrease in the price of the substitute good coffee, the demand curve for tea shifts to the left even when its price is constant. When the price of tea is OP1, the quantity demanded is OT1 as shown in the diagram. Now, the consumer is willing to buy P1C2 quantity of tea which is equal to OT2. Thus, the consumer shifts from D1 to D2, consuming less of tea even when the price of tea is constant. This is a situation of backward shift in the demand curve.
Complementary good: Complementary goods are purchased jointly such as ink and ink pens. If there is a decrease in the price of a good, then the demand for another good will increase. So the demand curve shifts parallel to the right, i.e. from D1D1 to D2D2.