Question

Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected and indicate whether demand or supply for minivans increases or decreases.

a. People decide to have more children.

b. A strike by steel workers raises steel prices.

c. Engineers develop new automated machinery for the production of minivans.

d. The price of sports utility vehicles rises.

e. A stock market crash lowers people’s wealth.

Answer 1

a. when people decide to have more children, the demand for minivans will increase as the size of family increases. This will not create any changes in the supply and hence the supply remains the same. Here the determinant of demand which is affected is the change in preferences or tastes.This will hence cause both the equilibrium price and quantity to rise.

b. When a strike by steel workers raises steel prices, the cost of producing minivans using the steel components rise. This will decrease the quantity of minivans supplied. This results in reduced quantity supplied and higher prices to compensate the cost of production. The demand for minivans remain the same. Here the determinant of supply which is affected is the rise in input prices.

c. when the Engineers develop new automated machinery for the production of minivans, the supply of minivans increases as the firms incur less production costs. But the demand remains the same and is unaffected by the change. Here, the determinant of supply which is affected is the improvement in technology which leads to lower prices and higher quantity supplied.

d. when the price of sports utility vehicle rises, the demand for minivans increases as both of them are considered to be substitutes of each other. But the supply is unaffected by this change. Hence, both the price and the quantity demanded rise at equilibrium. Here, the determinant of demand which is affected is the price of a related/substitute good.

e. when a stock market crash lowers peoples wealth, the income of people fall.This will naturally decrease the demand for minivans as people have lower incomes. This will not affect the supply of minivans. Here, the determinant of demand which is affected is the normal good(minivan), which decreased with the fall in income.