Answer:

Diagram:

A demand and supply diagram should be drawn. The diagram should clearly label the axes (Price on the vertical axis, Quantity on the horizontal axis). The demand curve should be downward sloping (D), and the supply curve should be upward sloping (S). A point where the D and S curves intersect represents the equilibrium price (Pe) and equilibrium quantity (Qe).

Explanation:

• Increase in Consumer Income: An increase in consumer income generally leads to an increase in the demand for normal goods. This causes the demand curve to shift to the right (D1 to D2).
• New Equilibrium: The rightward shift in the demand curve results in a new equilibrium point where the demand curve (D2) intersects the supply curve (S). This new equilibrium will have a higher equilibrium price (P2) and a higher equilibrium quantity (Q2) compared to the original equilibrium (Pe and Qe).
• Impact on Price and Quantity: The price of the good increases, and the quantity bought and sold also increases. This is because consumers are now willing and able to buy more of the good at the higher price.
• Normal Goods: This explanation assumes the good is a normal good. The demand for inferior goods (e.g., cheap instant noodles) may not increase with an increase in income.

(a) The demand curve should slope downwards from left to right, reflecting the law of demand. The supply curve should slope upwards from left to right, reflecting the law of supply. The axes should be labelled 'Price (P)' and 'Quantity (Q)'.

(b) The new demand curve will be to the right of the original demand curve, representing the increased demand. The equilibrium point will shift to a new equilibrium point where the new demand curve intersects the original supply curve. This new equilibrium will have a higher equilibrium price and a higher equilibrium quantity. The diagram should clearly show this shift.

(c) Producer surplus is the difference between the price producers receive and the minimum price they would be willing to accept. When demand increases, the equilibrium price rises. Since producers are now selling at a higher price, their producer surplus increases. The area above the supply curve and below the new equilibrium price line represents the increased producer surplus.

This situation, where the quantity demanded falls by a smaller percentage than the price increases, suggests that the product is relatively inelastic.

• Law of Demand: The law of demand states that as the price of a good increases, the quantity demanded decreases. However, the magnitude of this decrease can vary.
• Inelastic Demand: When demand is inelastic, consumers are not very responsive to price changes. This can be because:

  • The product is a necessity (e.g., medicine).
  • There are few close substitutes available.
  • The product represents a small proportion of the consumer's budget.

• Impact on Total Revenue: Because the quantity demanded changes by a smaller percentage than the price, the total revenue will increase. The increase in price outweighs the decrease in quantity.

  For example, if the price increases by 10% and the quantity demanded falls by only 5%, total revenue will increase.

In summary: The fact that quantity demanded falls by a smaller percentage than price increase indicates inelastic demand. This occurs when consumers are not very responsive to price changes, leading to an increase in total revenue when the price rises.