Suppose D 0 and S 0 are the initial demand and supply curves for tablets. P 0 *

Question

Suppose D0 and S0 are the initial demand and supply curves for tablets. P0* and Q0* are respectively the initial equilibrium price and initial equilibrium quantity in the market for tablets. Rapid economic growth over the last three years has substantially increased the disposable income of most households. Using comparative statics, analyze how the equilibrium price and equilibrium quantity in the market for tablets will change as a result of the increase in disposable income. How do I illustrate your answer with graph.

Explanation / Answer

As the income of consumers rises, they demand more tablets at every given price. As a consequence to that, quantity of tablets demanded at each price goes up and the demand curve shifts rightward. The new demand curve is shown as D1 in the above figure. At the new equilibrium, that is, at the intersection between the supply curve and new demand curve, both the equilibrium price and the equilbrium quantity of tablets are higher than their earlier level.

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