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

Question

Quizplus · Accepted Answer

An increase in buyers' incomes for a normal good will increase the demand, causing the equilibrium price and quantity to increase. However, an increase in input prices will increase the cost of producing the good, leading to a decrease in the supply and an increase in the equilibrium price. The impact on equilibrium quantity would be ambiguous as the increase in demand and the decrease in supply are opposing forces. Therefore, we would expect the equilibrium price to increase, but the impact on the equilibrium quantity would be ambiguous.

Suppose That the Incomes of Buyers in a Particular Market