How does a change in consumer income affect market equilibrium?

A change in consumer income can shift the demand curve, thereby affecting the market equilibrium.

When consumer income increases, consumers have more disposable income to spend, which can lead to an increase in demand for goods and services. This is because consumers can afford to buy more at each price level, causing the demand curve to shift to the right. As a result, the market equilibrium price and quantity will increase. This is known as a positive income effect.

Conversely, when consumer income decreases, consumers have less disposable income to spend, which can lead to a decrease in demand for goods and services. This is because consumers can afford to buy less at each price level, causing the demand curve to shift to the left. As a result, the market equilibrium price and quantity will decrease. This is known as a negative income effect.

However, it's important to note that the effect of a change in consumer income on market equilibrium also depends on the type of good or service. For normal goods, an increase in income will lead to an increase in demand, while a decrease in income will lead to a decrease in demand. For inferior goods, an increase in income will lead to a decrease in demand, while a decrease in income will lead to an increase in demand.

Furthermore, the elasticity of demand for the good or service also plays a role. If the demand is elastic, a small change in income can lead to a large change in quantity demanded, significantly affecting the market equilibrium. If the demand is inelastic, a change in income will have a smaller effect on quantity demanded and the market equilibrium.

IB Economics Tutor Summary: When people's income changes, it affects how much they can buy, which shifts the demand curve and changes the market's balance of price and quantity. If income goes up, demand usually increases, moving the curve right and raising both price and quantity. If income drops, the opposite happens. The impact also depends on whether goods are normal or inferior and how responsive demand is to income changes.