Explain with the help of diagrams, the effect of the following changes on demand for a good (6)
(1) Rise in the income of its buyers.
(2) Fall in the income of its buyers.
Answers
Answer: Income and demand has a positive relationship for normal goods.
Explanation:
As income increases, demand also rises. On the contrary when income decreases demand also falls. But in economics there are some goods known as "inferior goods". For such goods(inferior goods) demand decreases when income increases and vice versa.
In the following diagram, D is the original point. When income increases, demand rises and shift to point D1. The demand curve is upward sloping showing that there is a positive relationship between demand and income(when income increases demand increases). But this is in case of Normal Goods.
The second diagram shows the effect on demand in the case of inferior goods.
Here when income rises from 2 to 3, demand falls and vice versa. The demand curve is downward sloping which shows that there is a negative relationship between income and demand(when income increases demand decreases)
