The price of a normal good falls. Through the income effect alone, what happens to its demand, and why?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → It rises, because purchasing power rises and demand for a normal good rises with income
A fall in price raises purchasing power, like a rise in income. Demand for a normal good rises with income.
Option (1) It rises, because the good becomes cheaper than other goods and replaces them — Incorrect. This is the substitution effect.
Option (2) It falls, because purchasing power rises and the consumer needs less of the good — Incorrect. More purchasing power means more of a normal good.
Option (3) It rises, because purchasing power rises and demand for a normal good rises with income — Correct. Demand for a normal good moves with income.
Option (4) It does not change, because the consumer’s money income stays the same — Incorrect. Its purchasing power still rises.
NCERT (2026-27): “2.4.2 Deriving a Demand Curve from Indifference Curves and Budget Constraints … When bananas become cheaper, the consumer maximises his utility by substituting bananas for mangoes in order to derive the same level of satisfaction of a price change, resulting in an increase in demand for bananas. … Moreover, as price of bananas drops, consumer’s purchasing power increases, which further increases demand for bananas (and mangoes). This is the income effect of a price change, resulting in further increase in demand for bananas. …” “2.4.3 Normal and Inferior Goods … For most goods, the quantity that a consumer chooses, increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods. …” |