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Average incomes

Incomes affect the demand for a business’s product or service. If average incomes rise then this might increase the demand for a business’s product or service, and vice versa. But, this depends on whether the increase is above the rate of inflation, ie there has been a rise in real income. Changes in real income are changes in money income after adjusting for changes in prices. If, for example, inflation is 3% and nominal wages rise by 3%, then the wage rise would be cancelled out by the 3% rise in prices, leaving people no better off. If, on the other hand, the income rise of 3% is above the inflation rate, then people would experience a rise in their real incomes. If real incomes rise by 3% there is likely to be increased demand for a business’s product or service – shown as a rightward shift of the demand curve.

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