Practicing Success
In a market for coarse grains, there is equilibrium in place with market demand already equal to market supply. Suddenly the income of consumers of coarse grains increase. What will be the effect on equilibrium price and quantity? |
Price decreases, quantity decreases Price increases, quantity decreases Price increases, quantity decreases Price decreases, quantity increases
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Price decreases, quantity decreases |
Coarse grains are inferior goods. So with increase in income of consumers, they shift to better alternatives and demand for inferior goods decrease. This leads to leftward shift of demand curve of coarse grains due to decrease in demand for coarse grains. Supply curve is unchanged. This creates a situation of excess supply. In this situation, the quantity decreases and price also decreases. |