Question

In the following situations graphically illustrate what happens to supply or demand for domestically produced new motor vehicles loans at lower interest rates.

1. Trade restrictions raise the price of foreign produced cars.
2. Banks are offering easier access to motor vehicles at lower interest rates.
3. Carpooling becomes more popular as an advertising campaign promoting environmental responsibility is released.
4. Income levels falls as many lose their jobs in the current recession.
5. Consumers expect prices of the new motor vehicle to rise in the future and at the same time a shortage of steel causes production costs to rise.
6. Driving classic (older model) motor vehicles becomes more popular.

Answer 1

In all graphs, D0 and S0 represent original demand and supply curves, intersecting at equilibrium point A. Initial equilibrium price is P0 and quantity is Q0.

(a)

Rise in price of foreign cars (substitute to domestic cars), increases the demand for domestically produced cars. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(b)

Easier access to vehicle loans eases the vehicle purchases cost, which increases the demand for new vehicles. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(c)

Increasing popularity of carpool reduces the demand for new cars. Demand curve shifts to left, decreasing price and decreasing quantity. In following graph, D0 will shift leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(d)

A fall in consumer income caused by job loss reduces the demand for new cars. Demand curve shifts to left, decreasing price and decreasing quantity. In following graph, D0 will shift leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(e)

If consumers expect price to rise in future, they buy more cars now, raising current-period demand. Demand curve shifts to right, increasing price and increasing quantity. Simultaneously, increase in production cost reduces supply. The supply curve shifts to left, increasing price and decreasing quantity. The net effect is a definite rise in price, but quantity may increase, decrease or remain unchanged. In following graph, D0 shifts right to D1 and S0 shifts left to S1, intersecting at point B with higher price P1 and new quantity Q1.

(f)

More popularity of classic cars decreases the demand for new cars. Demand curve shifts to left, decreasing price and decreasing quantity. In following graph, D0 will shift leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.