Question

1. (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?

Answer 1

(a)

The demand curve for SUVs is downward sloping. The supply curve of SUVs is upward sloping.

Following figure shows the market for SUVs -

The equilibrium in the market for SUVs is attained at point E, where demand curve for SUVs, D, is intersecting the supply curve of SUVs, S.

(b)

It has been stated that the price of gas falls dramatically. This will increase the demand for SUVs. So, demand curve for SUVs will shift rightward from D to D1.

The technology used to manufacture SUVs improves. This will lower the cost of production of SUVs and would result in an increase in supply. So, supply curve of SUVs will shift rightward from S to S1.

Now, it is stated that the drop in gas has a much bigger impact on the market than the technology improvement.

This means that right ward shift of the demand curve is greater than the rightward shift of the supply curve.

Following is the market after given events -

(c)

The new equilibrium is attained at point E1. The new equilibrium price is P1 and the new equilibrium quantity is Q1.

Thus,

Both the equilibrium price of SUVs and the equilibrium quantity of SUVs has increased.