Question

3. (a) Draw the market for SUVs in equilibrium. Label your graph neatly and correctly.

(b) Now show what happens in the market when the price of gas falls dramatically and the technology used to manufacture SUVs improves, if the drop in gas has a much bigger impact on the market than the technology improvement.

( c) What will happen to the new equilibrium price and quantity of SUVs?

4. Draw three different supply curves on a graph:

1. Make S1 highly elastic
2. Make S2 highly inelastic
3. Make S3 perfectly inelastic
4. Which supply curve is the supply curve for Vincent van Gogh’s masterpiece, “A Starry Night”?
5. Which supply curve is for an ice cream manufacturer?
6. Which supply Curve if for an airplane manufacturer?

Answer 1

a) The market for SUVs in equilibrium has been shown in the graph below. E is the point of equilibrium. Qo is the equilibrium quantity of SUVs and Po is the equilibrium price.

b) When the price of gas falls dramatically and the technology used to manufacture SUVs improves with drop in gas having a much bigger impact on the market than the technology improvement, there is a shift in both the demand and the supply curves of SUVs. The demand curves shifts to the right as gas is a complementary good and with fall in its price, the demand for SUVs will increase. The supply curve will also shift rightwards sice an improvement in the technology leads to an increased supply for the SUVs. However, the shift in the demand curve will be more than the shift in the supply curve. thus, the demnd curve shifts from DD to DD1. Supply curve shifts from SS to SS1, as shown in the graph below.

c) As a result of the shift in both the curves the new equilibrium is obtained at E1. Thus, the equilibrium quantity has increased from Qo to Q1 and, the equilibrium price has increased from Po to P1.

Three different supply curves as required:

* The supply curve for Vincent van Gogh’s masterpiece, “A Starry Night” is shown by S3, since it is the only available and unique work and no matter how much the price changes, the supply is always the same.

* The supply curve for an ice cream manufacturer is shown by S1, since even a slight change in the price of ice-cream can induce change in its supply.

* The supply curve for an airplane manufacturer is shown by S2 since the change in price of an airplane would not have much impact on its supply.