Question

According to the New York Times (11/18/06) the number of car producers in China is increasing rapidly. The newspaper reports that “China has more car brands now than the United States.” But while car sales have climbed 38% in the first three quarters of the year, automakers have increased their output even faster, causing fierce competition and a slow erosion of prices.” At the same time, Chinese consumer incomes have risen. Assume that cars are a normal good. Use a diagram of the supply and demand curves from cars in China to show what is happening. Explain verbally, too. Label and describe shifts and directions of Q and P carefully. Explain in 2 Paragraphs mininum. include diagram.

Answer 1

First of all, china’s car market was in equilibrium point 1t E, where there supply denoted with S and demand curve denoted with D intersect each other at a point. The Price of equilibrium was OP and the quantity of equilibrium was OQ. It has been on condition that the increase in income has fuelled the sales of cars in China’s outcome in demand for cars rises. In reaction to the rising in demand, the manufacturing of cars also maximized their yield. The Rise in yield (output) has outrun the rise in demand. This emphasizes that demand and supply increase but supply > demand. A Rise in the demand and supply, shift both the curve the rightward side. But if we compare both the curve then curve of supply will shifts more rightwards than rightward ness of the demand curve. The new equilibrium was achieved at the E1 point, where both new curves intersecting each other D1 demand curve and supply curve S1. OP1 new equilibrium price and OQ1 are the new equilibrium quantity. The Price of equilibrium has fallen while Q has risen. Thus, the demand for cars in China is rising but more rise in supply as compared to the rise in demand has placed the fall the constraint on prices and outcomes in corrosion of prices.