Relationship between Income and Demand

Relationship between Income and Demand
Relationship between income and demand can be studied by taking into consideration these two types of goods. These are: 
(a) Normal goods
(b) Inferior goods
(a) Normal Goods
These goods are demanded more with the increase in the income of the consumer. There is a positive relationship between income and demand of normal goods.
How Demand Curve of a Normal Good Changes When Income of the Buyer changes? 
Income of the buyer may increase or decrease. 
(a) Increase in Income: In a situation of increase in income, more of a normal good is purchased even when it's price is constant. This refers to a situation of increase in demand or forward shift in demand curve. 
(b) Decrease in Income: In a situation of decrease in income, less of a normal good is purchased even when its price is constant. This refers to a situation of decrease in demand or backward shift in demand curve. 
Following curve illustrates both these situations. 
(b) Inferior Goods
These goods are demanded less with the increase in the income of consumer. There is a negative relationship between income and demand of inferior goods. 
How Demand Curve of an Inferior Good changes when Income of the Buyers changes? 
Income of the buyer may increase or decrease.(a) Increase in Income: In a situation of increase in income, less of the inferior good is demanded. The consumer prefers to shift on to superior substitutes. Because now he can afford them. Buying less of a commodity at its existing price implies backward shift in demand curve or decrease in demand. 
(b) Decrease in Income: If income decreases, the consumer already consuming inferior good is further compelled to depend on it. And he may buy more of inferior goods. It implies a situation of forward shift in demand curve or increase in demand curve for inferior goods. 
Following curve illustrates both these situations. 

Comments

Post a Comment

If you have any doubt, please let me know.

Popular posts from this blog

CONSUMER'S EQUILIBRIUM (INDIFFERENCE CURVE ANALYSIS)

Image
Indifference Set Indifference set is a set of different combinations of two goods which offers the consumer the same level of satisfaction. Indifference Curve Indifference curve is a curve which shows different combinations offering the same level of satisfaction to the consumer.  Properties Of Indifference Curve(IC)  (1) IC Slopes Downward- IC slopes downward from left to right. It means that IC has a negative slope. It implies if the consumer decides to have more of one good, he must have less of the other.  (2) IC is Convex to the Origin- It means that the slope of IC tends to decline, as we move along the IC from left to right. (3) Higher IC shows Higher Level of Satisfaction- A set of ICs drawn in a graph is known as Indifference map.Each IC in the indifference map corresponds to different level of consumer's income. Higher IC indicates higher level of satisfaction. (4) IC doesn't touch X-axis or Y-axis - This i
Read more

Impact of Tastes and Preferences on Demand for a Commodity

Image
Impact of Tastes and Preferences on Demand for a Commodity Tastes and Preferences of the buyers are determined by three factors,  (1) Individuals Likes and Dislikes: Individuals tend to buy more or less of a commodity simply because their likes and dislikes tend to change.  (2) Trends and Fashions: Most individuals are influenced by the emerging trends and fashions. They simply want to be 'trendy'; accordingly, they prefer to buy more of a commodity which is the latest trend or fashion.  (3) Climatic Environment: The tastes and preferences of consumers tend to change with change in climatic environment. Winter season induces them to goods like, tea and coffee while summer season induces them to goods like, cold drink and ice cream.  Favourable and Unfavourable Change in Tastes and Preferences Favourable change in tastes and preferences induces the buyers to buy more of a commodity even when it's price continues to be the same this is a situation of increase in demand, imply
Read more

CONSUMER'S EQUILIBRIUM(UTILITY ANALYSIS)

Image
CONSUMER'S EQUILIBRIUM (Utility Analysis)  Consumer's equilibrium refers to a situation when a consumer maximises his satisfaction, spending his given income across different goods and services.  Different cases of consumer's equilibrium (1) When only one commodity is consumed (2) When two or more commodities are       consumed.  Consumer's Equilibrium: One Commodity Case Purchase of a commodity by a consumer depends on three factors:  (a) Price of a commodity.  (b) Marginal utility of commodity.  (c) Marginal utility of money.  Marginal Utility of Money Marginal utility of money refers to worth of a rupee to a consumer. A consumer defines it in terms of utility that he derives from a standard basket of goods that he can buy with a rupee.  Diagram: One Commodity Case From the above diagram it is clear that (1) MUx is a downward sloping curve showing       that MUx declines as consumption of       commodity-X increases.  (2)Px indicates market price of commod
Read more