Question

Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. Use the 4-step process to demonstrate the effect of this change in the market for electric vehicles. Explain why you have drawn the change you have.

Has there been a change in demand? Explain.

Analyze and explain the change in the equilibrium price and quantity. Explain

1. Explain how any equilibrium price and quantity combination is efficient. Use 1 of the following in your explanation. Be sure to define your terms.
   1. producer and consumer surplus
   2. allocative and productive efficiency
   3. Pareto efficiency to address this.

Answer 1

Ans: when there is a sharp drop in cost of lithium-ion batteries that used as an input of electric vehicles definitely there is a drop in cost of production and that has an impact on the price of the product and it has a direct impact on the demand for product.

The 4-step demonstration effect of the change in market for electric vehicle:

step 1:

Drawing demand curve and supply curve to show the before change in cost of input, i.e cost of lithium-ion batteries.

step 2:

Deciding the economic effect on demand or in supply side, here in this case it has been asked for the changes in demand of particular product after change in cost.

step 3:

Decide the effect and draw the shift in demand or supply curve left or right accordingly. here the first step is the shift in the supply curve as the input price decreased. so the supply will be more and t react that the demand also shifted right.

step 4:

Identification of new equilibrium price and quantity and comparing with old one.

In the given graph the initial equilibrium position E0 points are P0 price Q0 quantity. After decrease in cost of battery the supply is more so the supply curve shift to right and the effect of that the demand curve also shifts to right. So the new equilibrium point is E1 with price P2 and quantity Q2. So the difference between these two equilibrium positions is the new equilibrium price is lower than the old one with high quantity demanded.

Presentation of equilibrium price and quantity is efficient through consumer surplus and producer surplus:

In the given graph the old equilibrium point is E0 which present the consumer surplus A and producer surplus B if there is any deviation from this point to left or right it will shows the high demand or high supply. Now, if we will discuss about the new equilibrium point E1 then both consumers surplus and the producer surplus both increased here this increment only possible due to the shift in supply curve from S to S1 and to the effect of that the demand curve shift from D to D1. So the new consumer surplus area is E and producer surplus area is F. if we will take the point J other then the equilibrium point, there demand is high and supply is less. In contrast if we will take T where supply is high and demand is low. So both of the cases the total surplus is not optimum and productive and allocates efficiency is not present. So at the point of E0 (old) E1 (new) both are having advantage of efficiency.