With the aid of an appropriate diagram, analyze the effect of an increase in consumers' income and increase in the cost of production of commodity X on the market of commodity X given that these changes occur at the same time or simultaneously.
1 Answer | Add Yours
If these two changes occur at the same time, we know that the equilibrium price will rise and the equilibrium quantity may drop or may rise. This is true because we will see an increase in demand and a decrease in supply.
Consumer income is one of the non-price determinants of demand. When consumers’ incomes rise, the demand for various goods and services will rise as well (all other things being equal). That is because, in general, we are willing and able to buy more things when we have more money. In your graph, you need to represent this by moving your demand curve up and to the right.
The costs of production are one of the non-price determinants of supply. When the price of making something rises, producers will, all other things being equal, make less of that thing. This is because they will make a lower profit. In your graph, you need to represent this with a movement of the supply curve up and to the left.
When you move the supply and demand curves in this way, you will see that the price rises. This is because an increase in demand and a decrease in supply both cause prices to rise. However, an increase in demand causes an increase in quantity while a decrease in supply causes a decrease in quantity. So, we will not know whether quantity will rise or fall until we see how much you move the two curves.
We’ve answered 318,911 questions. We can answer yours, too.Ask a question