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36 CHAPTER 2 DEMAND AND SUPPLY ANALYSIS

Price S

FIGURE 2.7 Shift
in Demand Due to an
Increase in Disposable
Income
If an increase in B
consumers’ disposable
incomes increases Equilibrium
price goes
demand for a particular up A
good, the demand
curve shifts rightward
(i.e., away from the ver-
tical axis) from D 1 to D 2 ,
and the market equilib-
rium moves from point D D
1 2
A to point B. Equilibrium
Quantity
price goes up, and
Equilibrium
equilibrium quantity quantity goes up
goes up.

the quantity demanded is greater than before. This shift moves the market equilibrium
from point A to point B. The shift in demand due to higher income thus increases both
the equilibrium price and the equilibrium quantity.
For another example, suppose wage rates for workers in a particular industry go
up. Some firms might then reduce production levels because their costs have risen
with the cost of labor. Some firms might even go out of business altogether. An
increase in labor costs would shift the supply curve leftward (i.e., toward the vertical

S 2 S
Price 1

FIGURE 2.8 Shift in
Supply Due to an B
Increase in the Price of Equilibrium A
Labor price goes
An increase in the price up
of labor shifts the sup-
ply curve leftward (i.e.,
toward the vertical axis)
from S 1 to S 2 . The mar-
ket equilibrium moves D
from point A to point B. Quantity
Equilibrium price goes Equilibrium
up, but equilibrium quantity goes down
quantity goes down.