Question

15.
There are two types of private cars in Country A: small-cylinder engine and large-cylinder engine. The gasoline price in Country A has increased rapidly recently. With the help of demand-supply diagrams, briefly explain why the increase in gasoline price leads to an increase in the price of new small-cylinder engine cars and a decrease in the price of new large-cylinder engine cars in Country A.

Answer 1

We must note that gasoline and car are complementary goods.

Complementary goods are the goods that are used together. An increase in price of one good leads to the decrease in the quantity demanded of the other good. Some examples of complementary goods are gasoline and cars, printers and cartridges etc.

As given, there are two types of cars— small-cylinder engine and large-cylinder engine. Due to an increase in the price of gasoline, the quantity demanded of large-cylinder falls and the quantity demanded of small- cylinder car increases.( due to changes in preferences of consumers) Due to changes in quantity demanded, the demand curve shifts. Since there is an inverse relationship between the price and quantity demanded, a fall in quantity demanded will lead to a leftward shift of the demand curve. The new equilibrium will be achieved at a lower price.

Image-1 shows the supply and demand curves of large -cylinder cars. Initially, the demand and supply curves , DD1 and SS1 respectively, intersect at point E. At equilibrium, the quantity demanded is Q1 and price is P1. Due to decrease in quantity demanded of large-cylinder cars, the demand curve for large - cylinder shifts leftward from DD1 to DD2. The new equilibrium is achieved at E2. With such a shift, the price falls from P1 to P2 and Equlibrium Quantity falls from Q1 to Q2.

In image -1, we  show the supply and demand curves of small -cylinder cars. Initially, the demand and supply curves , DD1 and SS1 respectively, intersect at point E. At equilibrium, the quantity demanded is Q1 and price is P1. Due to increase in quantity demanded of small -cylinder cars, the demand curve for small - cylinder shifts rightward  from DD1 to DD2. The new equilibrium is achieved at E2. With such a shift, the price increases from P1 to P2 and Equlibrium Quantity increases from Q1 to Q2.