Question

Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market?

Answer 1

Answer:

an indeterminate effect on equilibrium quantity and a fall in equilibrium price.

Explanation:

A normal good is a good whose demand increases when income increases and falls when income falls.

If income falls and the good is a normal good, demand would fall. This would lead to a fall in price and quantity.

If cost of input falls, the cost of production would fall and supply would increase. This would lead to an increase in quantity and a fall in price.

The combined effect would an indeterminate effect on equilibrium quantity and a fall in equilibrium price.

I hope my answer helps you

Answer 2

Answer:

The equilibrium price would decrease, but the impact on the amount sold in the market would be ambiguous.

Explanation:

Two separate things should happen in this market:

• a decrease in the production costs will shift the supply curve to the right which should decrease the price of the good at all demand levels. Generally the equilibrium quantity should increase.
• a decrease in the income of buyers will shift the demand curve to the left, decreasing the equilibrium price. Generally the equilibrium quantity should decrease.

Both events will result in a decrease of the equilibrium price, so it is safe to say that the equilibrium will fall. But one event increases the equilibrium quantity, while the other decreases it. So the net effect on the equilibrium quantity is unknown, it could increase or decrease.