Question

With the decrease in gas prices, demand has shifted toward large cars and SUV's, away from hybrid cars like the Prius. Draw a graph showing the supply and demand for hybrid cars before and after the decrease in the price of gas. What do you predict will happen to the price of hybrids as the price of gasoline falls?

Answer 1

Following graph shows the Market for Hybrid Cars -

Initially(before the decrease in the price of gas), the market for hybrid cars was in equilibrium at point E1, where demand curve for hybrid cars, D1, was intersecting the supply curve of hybrid cars, S1. The equilibrium price of hybrid cars was P1 and the equilibrium quantity of hybrid cars was Q1.

Now, it has been stated that gas prices has decreased. This has shifted the demand towards large cars and SUV's and away from the hybrid cars.

This implies that this decrease in price of gas has resulted in a decrease in demand for hybrid cars.

This will shift the demand curve for hybrid cars to the left.

New equilibrium (after the decrease in price of gas) is attained at point E2, where new demand curve, D2, is intersecting the supply curve, S1. The new equilibrium price is P2 and new equilibrium quantity is Q2.

Thus, the price of hybrids has decreased as the price of gasoline falls.