Change in demand if income increases

After you have worked through this section of the learning unit, you should be able to:

  • illustrate, by using demand and supply curves, what happens to the equilibrium price and equilibrium quantity if the demand increases

To analyse the impact of a change in demand, we will use our demand and supply curves for fried chicken pieces.

Market for fried chicken

Let us see what happens in this market if household income increases.

A change in income will have an impact on the demand curve since it is one of the non-price factors that determines demand. We also know that a change in any of the non-price factors of demand will cause a shift of the demand curve. This is because at every price, the quantity demanded will change.

We also previously established that an increase in income causes an increase in demand, and at each price, a higher quantity is demanded than before. The demand curve therefore shifts to the right. This is represented by a rightward shift of the demand curve from D to D1 in the following diagram:

Impact of an increase in demand

By comparing the new equilibrium position, E1, with the previous equilibrium position, E, you can see that the equilibrium price increases from R4 to R6 and the equilibrium quantity increases from 3 000 to 4 200. At this new equilibrium position, both the quantity demanded and the quantity supplied increase from 3 000 to 4 200.

Watch the following video clip about the impact of an increase in demand.

From this analysis we can conclude that an increase in income causes an increase in demand, which causes an increase in the equilibrium price and equilibrium quantity.

Do the following activity on the impact of a change in demand on the equilibrium position:

Use the following diagram to indicate what happens to the equilibrium position if the demand increases because of an increase in income:

There is (a rightward shift; a leftward shift; no shift) of the demand curve.

Correct.

An increase in income causes an increase in demand and at each price the quantity demanded is higher.  This is indicated by a rightward shift to the demand curve.

Think again.

A leftward shift occurs when demand decreases.

Think again.  A change in income cause a change in demand and the demand curve will shift.

There is (a rightward shift; a leftward shift; no shift) of the supply curve.

Think again.  The supply curve does not shift

Think again.

The supply curve does not shift.

Correct.  It is demand curve that shifts if income changes.

The equilibrium price (increases; decreases; stays the same).

Correct.

An increase in demand causes an increase in the equilibrium price.

Think again.

An increase in demand increases the equilibrium quantity.

Think again.

An increase in demand increases the equilibrium quantity.

The equilibrium quantity (increases; decreases; stays the same).

Correct.

An increase in demand causes an increase in the equilibrium quantity.

Think again.

An increase in demand increases the equilibrium quantity.

Think again.

An increase in demand increases the equilibrium quantity.

Use the following diagram to indicate what happens to the equilibrium position if the demand decreases because of a decrease in the taste and preference for the product:

  1. There is (a rightward shift; a leftward shift; no shift) of the demand curve.
  2. There is (a rightward shift; a leftward shift; no shift) of the supply curve.
  3. The equilibrium price (increases; decreases; stays the same).
  4. The equilibrium quantity (increases; decreases; stays the same).
Click to see the answer
  1. There is a leftward shift of the demand curve.
  2. There is no shift of the supply curve.
  3. The equilibrium price decreases.
  4. The equilibrium quantity decreases.

A decrease in taste and preferences decreases demand, and the demand curve shifts to the left. The impact of this is that the equilibrium price decreases and the equilibrium quantity decreases.