Question

How are equilibrium price and quantity affected when income of the consumers decrease.

Answer 1

Decrease in the income of consumers

The decrease in consumers’ income is depicted by leftward parallel shift of demand curve from D₁D₁ to D₂ D₂. Consequently, at the price P^e, there will be an execs supply (q^e − q₁), resulting the price to fall. At the new equilibrium (E₂), where D₂D₂ intersect the supply curve, the equilibrium price falls from P^e to P₂ and the equilibrium quantity falls from q^e to q₂.