Question

In recent years, the Chinese government has allowed many automobile factories to be built in China by companies such as the Shanghai Automotive Industry. Many of these cars are intended for the Chinese market. At the same time, incomes in China are rising. Draw a clearly labeled graph to explain what is happening in the Chinese auto market.

Answer 1

Increase in consumer income will increase demand, shifting demand curve rightward, increasing both price and quantity. At the same time, higher number of firms will increase supply, shifting supply curve rightward, decreasing price and increasing quantity.

The net effect is a definite increase in quantity. But price may increase, decrease or remain unchanged, explained as follows.

In each graph, D0 and S0 are initial demand and supply curves intersecting at point A with equilibrium price P0 and quantity Q0.

(1) Rightward shift in demand is more than the rightward shift in supply: Price is higher

In following graph, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with higher price P1 and higher quantity Q1.

(2) Rightward shift in demand is less than the rightward shift in supply: Price is lower

In following graph, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with lower price P1 and higher quantity Q1.

(3) Rightward shift in demand is equal to the rightward shift in supply: Price is the same

In following graph, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with same price P0 and higher quantity Q1.