Question

How do the following affect the equilibrium price and quantity? Show graphically.

A reduction in consumers’ income

Answer 1

When consumers’ income decreases, the demand for normal goods falls. This results in a leftward shift of the demand curve, causing both the equilibrium price and quantity to decline. In the given figure, the demand curve shifts from D₀D₀ to D₂D₂ due to the drop in demand.

At the original price OP₀, the quantity supplied exceeds the quantity demanded, creating excess supply. This puts downward pressure on the price. The price keeps falling until it reaches OP₂, where the new demand curve intersects the supply curve (SS) at point E₂, the new equilibrium.

As a result, the equilibrium price falls to OP₂ and the equilibrium quantity decreases to OQ₂.