Question

Consider the market of automobiles in BC is initially in equilibrium. Then for each of the market shock listed below, use appropriate supply and demand curve to depict the effect of each shock on the equilibrium price and quantity.

1. An increase in the price of automobiles.
2. Disposable income in BC increased due to government policy that aimed at uplifting the living standard of people in BC
3. Technological advanced enabling more efficient production of cars.
4. A combined effect of an increase in the cost of production of cars and a decrease in gasoline prices.
5. A government policy putting a quota restriction on the imported cars and a 50% govt subsidy for public transit in BC resulting in a cheaper transit fares for the residents.

Answer 1

A.

It will cause price to increase and quantity demanded to decrease. Supply curve will shift to the left.

B.

It will cause demand curve to shift to the right. As a result, price and quantity both will increase at a new equilibrium.

C.

It will cause price to decrease and quantity to increase at a new equilibrium. Here, supply curve will shift to the right.

D.

Increase in cost of production, will cause supply curve to shift to the left. Decrease in gasoline price, will increase the demand and demand curve will shift to the right. So, price will increase for sure. But, quantity will be dependent upon the size of change. If increase in demand is more than the decrease in supply, then quantity increases and vice versa.

In D-1, quantity increases, but in D-2, quantity decreases.

E.

Quota restriction, will increase the supply and supply curve will shift to the right. But, subsidy on public transit, will decrease the demand for automobiles. It will cause price to decrease. For quantity, if decrease in demand is more than the increase in supply, then quantity decreases. If decrease in demand is less than the increase in supply, then quantity increases.

In E-1, quantity increases, but in E-2, quantity decreases.