Question

Consider the market for cars which we will assume to be a normal good. Explain, without using graphs, what would happen to the supply or demand curve, and to equilibrium price and quantity of cars in each of the following situations:

1. A technological advance in the methods of producing cars. Due to a recession, households experience a decrease in income.

2. incomes decline

3. There is a technological advance and a decrease in income at the same time

Answer 1

Answer;

In the above all figures x-axis shows quantity and y-axis shows price .D is the demand curve and S is the supply curve. E is the initial equilibrium point and E1 is the new equilibrium point. Graph A,B and C shows the following effects respectively.

1. As the result of a technological advance in the methods of producing cars, the production increases, the supply curve shift to the right. Due to a recession, households experience a decrease in income, the demand reduces, the demand curve shifts to the left. The price reduces from p to p1 and quantity is uncertain because the magnitudes of the shifts are unknown.

2. If incomes decline, the demand also decreases, the demand curve shift to the left. The price reduces from p to p1 and quantity also reduces from q to q1.

3. As the result of the technological advance, the production increases, the supply curve shift to the right and due to decrease in income, the demand reduces, the demand curve shifts to the left. The price reduces from p to p1 and quantity is uncertain because the magnitudes of the shifts are unknown.