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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

Households in Pune regard scooters as a normal good. Over a year, the average household income rises, while the price of scooters stays at ₹90,000. Which outcome is most consistent with economic theory?

Demand for scooters increases, shown by a rightward shift of the demand curve. Scooters are a normal good, so higher household income raises the quantity demanded at every price. Since the price itself is unchanged, there is no movement along the original curve.

  1. AA contraction in quantity demanded along the existing demand curve
  2. BAn extension in quantity demanded along the existing demand curve
  3. CA rightward shift of the demand curve, i.e. an increase in demandCorrect
  4. DA leftward shift of the demand curve, i.e. a decrease in demand

Explanation

For a normal good, higher income raises the quantity people want to buy at every price. That shifts the whole demand curve to the right, which is an increase in demand. The price is unchanged, so there is no movement along the curve. A leftward shift would apply to an inferior good.

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