Question

1. Suppose the incomes of buyers in a market for a particular normal good decrease. Draw demand and supply curves and show what will happen to the new equilibrium price and quantity. Will they increase or decrease?

2. Suppose there is a reduction in input prices. Draw demand and supply curves and show what will happen to the new equilibrium price and quantity. Will they increase or decrease?

3. Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market? (Will price and quantity go up, down, or is ambiguous to determine?)

Answer 1

Ans) 1) With decrease in income, demand will decrease and demand curve will shift to the left. As a result, both price and quantity will decrease.

2) Reduction in input price (ie decrease in price of raw materials) will increase the supply and supply curve will shift to the right. As a result, price will decrease and quantity will increase.

3) With decrease in income, demand will decrease. And with decrease in input prices, supply will increase. As a result, price will decrease and quantity will depend upon the magnitude of shift of demand and supply curve.