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Using diagrammatic analysis and appropriate examples describe and explain the following the effect of each of the following:
a) An increase in income on the consumption of a normal good
b) An increase in income on the consumption of an inferior good
c) A fall in the relative price of a good on the consumption of another complementary good
d) A fall in the relative price of a good on the consumption o another substitute good
A) An increase in consumption o a normal good
A normal good is a good such as new clothes, for which demand increases, or shits rightwards when there is an increase in consumer's income.
When the consumers incomes increases the respond by buying more of both the products so the buy more pizza and Coke.
an increase in income will increase the market demand as more willing and able to buy more pizza.
If income increases then some consumers will be willing to buy more pizza at each price so market demand increases, resulting in the demand curve shifting rightwards.
B) An increase in income on the consumption of an inferior good
An inferior good is a good such as used clothes or which demand decreases or shits leftwards as consumer income rises.
Here Pepsi is an inferior good, when consumer's income increases and the budget constraint shifts outwards the consumer buys more pizza and less Pepsi.
When market demand or new clothes will decrease when income increases.
The demand decreases when there is an increase in income. This is because people will tend to st ...