(a) Increase in income of consumers
If the number of firms is assumed to be fixed, then the increase in consumers' income will lead to increase in demand of consumers which results in the equilibrium price to rise.
Let us understand how it happens:
D1D1 and S1S1 represent the market demand and market supply respectively. The initial equilibrium occurs at E1, where the demand and the supply intersect each other. Due to the increase in consumers' income, the demand curve will shift rightward parallelly because of increase in the demand of the consumers while the supply curve will remain unchanged. Hence, there will be a situation of excess demand, equivalent to (qe - q1). Consequently, the price will rise due to excess demand. The price will continue to rise until it reaches E2 (new equilibrium), where D1D1 intersects the supply curve S1S1. The equilibrium price increases from Pe to P2 and the equilibrium output increases from qe to q2 and the equlibrium point shifts from E1 to E2.
(b) Decrease in the income of consumers
The decrease in consumers' income is depicted by leftward parallel shift of demand curve from D1D1 to D2D2 because of the decrease in the demand of consumers. Consequently, at the price , there will be an execs supply(qe - q1), resulting the price to fall. At the new equilibrium (E2), where D2D2 intersect the supply curve, the equilibrium price falls from Pe to P2 and the equilibrium quantity falls from qe to q2 and the equilibrium points shifts from E1 to E2.
