Question

An increase in consumer income, other things being equal, will a. shift the supply curve for a normal good to the right. b. cause an upward movement along the demand curve for an inferior good. c. shift the demand curve for an inferior good to the left. d. cause a downward movement along the supply curve for a normal good.

Short answer

The correct answer is c: An increase in consumer income, other things being equal, will shift the demand curve for an inferior good to the left. This is because as consumers' income increase, they demand less of the inferior good, as they are willing to buy better, more costly goods or services, resulting in a decrease in demand.

Step-by-step solution

Evaluating Statement a

A shift in the supply curve for a normal good to the right is related to an increase in the production of the good. Consumer income affects the demand, not the supply, unless there are more suppliers because consumers are spending more. In general, income doesn't directly cause a shift in the supply curve. So, this statement is not true.

Evaluating Statement b

An upward movement along the demand curve for an inferior good implies higher demand and price. Since inferior goods are those that see a decrease in demand when incomes rise, increased income generally causes a downward movement along the demand curve for an inferior good. So, this statement is also not accurate.

Evaluating Statement c

An increase in consumer income will cause a shift in the demand for inferior goods to the left. As consumers' income increase, they demand less of the inferior good, as they are willing to buy better, more costly goods or services. This results in a decrease in demand, represented by a shift to the left of the demand curve. So, statement c is correct.

Evaluating Statement d

A downward movement along the supply curve for a normal good would indicate that as the price decreases, the quantity supplied decreases. It's not related to changes in consumer income but to the price of the good. So statement d is not correct. The correct answer based on the analysis of the statements given is c: An increase in consumer income, other things being equal, will shift the demand curve for an inferior good to the left.

Key concepts

Consumer Income Effect

Understanding the consumer income effect is crucial in the study of economics. This effect pertains to the change in consumers' buying behavior as a result of a change in their income. As income increases, individuals typically have more disposable income and thus are able to spend more on goods and services.

For normal goods, which are items that consumers demand more of as their income rises, we can expect the demand curve to shift to the right. This rightward shift indicates an increase in the quantity demanded at each price level. Conversely, when incomes fall, consumers cut back on spending for these goods, leading to a leftward demand curve shift.

Through exercises like the one presented, students often encounter questions about the effects of changing consumer income on the demand for goods. It is important to remember that the demand curve itself represents different quantities demanded at various price points. A shift in this curve, therefore, signifies a change in demand not attributable to a change in the price of the good, but to external factors like changes in consumer income.

Normal vs Inferior Goods

When discussing the consumer income effect, it is essential to differentiate between normal and inferior goods. Normal goods are those whose demand increases as the consumer's income rises. This is because these goods are of higher quality or are more desirable as one's standard of living enhances.

Inferior goods, on the other hand, have the opposite reaction to changes in income. These are the goods that consumers turn to as cheaper alternatives when their income is lower. As consumers' income increases, they tend to forgo these goods in favor of better substitutes.

Returning to the textbook exercise, the recognition of a good as either normal or inferior is key to predicting how an income change will affect the demand curve. For normal goods, we expect an income increase to lead to a demand curve shift to the right, while for inferior goods, the same income increase results in the demand curve shifting to the left, reflecting a decrease in demand as individuals opt for higher-quality alternatives.

Economic Supply and Demand

The concepts of economic supply and demand are foundational to understanding market dynamics. The demand curve represents the relationship between the price of a good and the quantity demanded by consumers, while the supply curve shows the relationship between the price and the quantity supplied by producers.

Various factors can cause these curves to shift, indicating a change in supply or demand other than variations in price. On the demand side, these factors include consumer income, preferences, and the prices of substitute or complementary goods. On the supply side, factors such as production costs, technological advancements, and expectations of future price changes play significant roles.

The exercise previously mentioned delves into one aspect of how economic supply and demand can be affected. It is important for students to note that while demand can be influenced by consumer income, supply is typically not directly affected by changes in consumer income. Supply changes are more directly connected to producers' costs and capacities. By examining how each curve can shift in response to different economic circumstances, students gain insight into the complex interplay of forces that govern market economies.