Question

Use supply and demand curves and the 4-Step Approach to analyze the effects on the tractor market to the following conditions: there is a technological breakthrough in tractor production in India, at the same time there is an increase in the incomes of all citizens in India.

a. Show the 4-Step Approach in the text box below

b. Draw the graph, take a picture of it

Answer 1

The initial equilibrium point is at 'E' where the supply curve 'S' and the demand curve 'D' intersect each other.

Step 1: The technological innovation makes the production of tractor much cheaper than before and this induces the firm to produce more so the supply increases and the supply curve shifts from 'S' to 'S1'.

Step 2: As a result the price of tractor has decreased to 'P1' and the quantity increased to 'Q1'.

Step 3: The increase in the income leads to an increase in the purchasing power so the people will increase their demand for tractors, the demand will increase and the demand curve shifts from 'D' to 'D1'.

Step 4: This leads to an increase in the price, the price is back at the inital level of 'P' and the qauntity has increased to Q2. So the price did not change and quantity increased relative to the initial equilibrium.