Introduction

In this section, we deal with the impact of a change in income on the demand curve.

After you have worked through this section of the learning unit, you should be able to:

  • explain with the aid of a demand curve what happens to demand if the income of households increases or decreases

What do you think would happen to the market demand curve for fried chicken pieces if household income were to increase?




Let us move on to the next section to see what happens to the demand curve.

From the previous table, we know that at each price, a higher quantity of fried chicken pieces will be demanded if income increases. We now have a new demand curve to indicate the demand for fried chicken pieces at this higher income level.

  • At R7 per piece, the quantity of fried chicken pieces demanded is 16.
  • At R6 per piece, the quantity of fried chicken pieces demanded is 22.
  • At R5 per piece, the quantity of fried chicken pieces demanded is 28.
  • At R4 per piece, the quantity of fried chicken pieces demanded is 34.
  • At R3 per piece, the quantity of fried chicken pieces demanded is 40.
  • At R2 per piece, the quantity of fried chicken pieces demanded is 46.
  • At R1 per piece, the quantity of fried chicken pieces demanded is 52.

An increase in demand

Note again that at each price, the quantity demanded is higher. This is shown by a rightward shift of the whole demand curve (D) to the new demand curve (D1).

This new demand curve is to the right of the initial demand curve, and a rightward shift of the demand curve for fried chicken pieces has occurred.

The situation illustrated in the figure is referred to as an increase in demand or a shift to the right of a demand curve.

Watch the following video clip about the impact of an increase in income on the demand curve

Similarly, any decrease in demand (a decline in household income) will result in a shift to the left in the demand curve. This implies that at each price, fewer fried chicken pieces will be demanded than before.

Activity

Do the following activity about the impact of income on the demand curve:

The following diagram indicates the demand for red meat:

If red meat is a normal good, a decrease in income will _____ the demand for it.



Correct.

A normal good indicates that a positive relationship exists between demand and income. A decrease in income will decrease the demand for it, while an increase in income will increase the demand for it.

Think again.

Remember red meat is a normal good.

A decrease in income will cause the demand curve for red meat to shift to the _____.



Correct.

A decrease in income will decrease the demand, and the demand curve shifts to the left indicating that at each price the quantity demanded is lower.

Think again.

A decrease in income will decrease the demand, and the demand curve shifts to the left indicating that at each price the quantity demanded is lower.

A leftward shift of the demand curve indicates that at every price a higher quantity is demanded than before.



Think again.

False. A leftward shift indicates that at every price a lower quantity is demanded.

Correct.  The statement is indeed true.

False. A leftward shift indicates that at every price a lower quantity is demanded.