Question

Q1. Hybrid cars are generally considered as environment friendly solution for rising petrol prices across the globe. People prefer hybrid cars due their decreased dependence on petrol. Assume a market for hybrid cars. Identify which of the determinants of supply or demand are effected in each of the following situations. Indicate the increase or decrease in supply or demand. Draw a supply and demand diagram and show the effect on equilibrium price and quantity of the hybrid cars.

a) Government endorses a research that portrays hybrid cars as the best option available for better environment.
b) Price of petrol falls
c) Price of electric cars falls
d) COVID-19 pandemic induces recession that lowers people’s wealth
e) Students from NED University of engineering and technology develop a faster and cheaper production technology to produce hybrid cars

Answer 1

a) Impact of govt research which portrays hybrid cars as better option

• Impact -: The demand increases from D TO D1.
• The eq qty increases from Q to Q1 .
• The eq Price increases from P to P1.
• tHERE WILL BE EXTENSION ALONG THE SUPPLY CURVE.

b) Price of petrol falls.

Impact -:

• The demand decreases from D to D1 (because the fall in petrol prices will make the consumers shift to petroal cars and they will substitute hybrid cars with petrol cars).
• The eq qty decreases grom Q to Q1.
• The eq price decreases from P to P1.
• There is contraction along the supply curve from E to E1.

c) Price of electric car falls

Impact -:

• The supply increases from S to S1.
• The price decreases from P to P1.
• There is extension along the demand curve from D to D1.
• tHE EQ QTY increases from Q to Q1.

d) Covid - 19 triggers recession and lowers people's wealth

Impact -:

• Recession decreases the demand from D to D1 .
• There is contraction along the supply curve from E to E1.
• The eq price decreases from P to P1.
• The eq qty decreases from Q to Q1.

e)Positive supply shock due to techology

Impact -:

• The supply increases from S to S1 due to technological advancement.
• There is extension along the demand curve from E to E1.
• The eq price decreases from P to P1.
• The eq qty increases from Q to Q1.