Question

1. Write down a short-term demand function for your the new automobile industry. Utilize this function to estimate demand for the next month, on the assumption that: (a) Price remains unchanged, (b) Price increases. (c) Price decreases.

2. Short-term supply Write down a short term Supply function for the new automobile industry. Utilize this function to estimate supply for the next month, on the assumption that: (a) Price remains unchanged, (b) Price increases. (c) Price decreases. If applicable, show how the effect of a demand shock depends on the shape of the supply curve.

Answer 1

1) Let a demand function be , Q^d = a - bP
where b is the slope of demand curve.
According to the demand law, if price rises, demand will fall and vise versa. That is why the slope of the demand function is negative.
a) Price unchanged -
If price is unchanged, quantity demanded will be unchanged assuming all other factors are also unchaned.
b) Price increases -
If price increases, quantity demanded will decrease, ceteris paribus.
c) Price decrease -
If price decrease, quantity demanded will increase , ceteris paribus.

2) Let supply function be Q^S = c + dP
d is the slope of supply curve.
Since according to law of supply, as price rises supply also rise, thus the slope is positive.

a) Price unchanged -
If price is unchanged, quantity supplied will be unchanged assuming all other factors are also unchaned.
b) Price increases -
If price increases, quantity supplied will increase, ceteris paribus.
c) Price decrease -
If price decrease, quantity supplied will decrease , ceteris paribus.

If the supply curve is vertical straight line, any demand shock will not have any effect.

If the supply curve is horizontal straight line and in usual shape (upward rising), any small demand shock will have impact on quantity demanded.