Question

In the following scenario, begin with an initial equilibrium. Then, sketch what is happening in the market, and determine the directions of change for the equilibrium price and equilibrium quantity.

Market for Automobile Insurance

Auto insurers are confronted by competition among insurers, driving supply to increase by 24%. Mandatory requirements by law as driven demand for auto insurance to 40% this year.

Answer 1

Equilibrium is established where the demand and supply curves are equal. Here, an increase in the supply of insurers would shift the supply curve to the right, likewise, the demand for insurance also rises due to government mandatory actions to do so.

Here, rise in demand is larger than rise in supply, so both quantity and price of insurance would increase.

following is diagram:

In above diagram, relative rise in the demand is larger than the rise in supply, Price would rise from P to P1 and insurance quantity also rises from Q to Q1.