Economics

Employ a demand curve to explain what would happen to the demand for

a. new cars, if consumer income increased.

b. cream, if coffee prices increased 400%.

c. mopeds, if the price of gasoline triples.

d. DVD players, if the price of video discs fell 50%.

SOLUTIONS

A: Following is a supply-demand curve that shows the relationship between the quantity of new car demanded and the price of the new cars, holding consumer’s aggregate income constant:

Price of New Car, P

Supply

Equilibrium Price

Demand

Equilibrium Quantity

Quantity of New Car, Q

Market Equilibrium

Now, when consumer income increases, the demand for car increases: the demand curve shifts to the right as shown in the following figure:

D2

P2

P1

D1

S

Q1

Q2

So, the rise in aggregate income causes the demand for car to increase: at any given price, consumers now want to buy more cars. This is represented by the rightward shift in the demand curve from D1 to D2. The market moves to the new intersection of supply and demand. The equilibrium price rises from P1 to P2, and the equilibrium quantity of cars rises from Q1 to Q2.

B: Cream and coffee can be considered as the related goods and can be categorized as complements: cream is a product that is consumed in some proportion to coffee. For two complementary goods- cream and coffee, as the price of coffee increases (by 400%), the demand for cream decreases shifting the demand curve for the cream to the left as shown in the following figure:

Price of Cream, P

D2

D1

Quantity of Cream, Q

C: Mopeds and Gasoline can be considered as the related goods and can be categorized as complements: For two complementary goods- mopeds and gasoline, as the price of gasoline increases (triples), the demand for mopeds decreases shifting the demand curve for the mopeds to the left as shown in the following figure:

Price of moped, P

Quantity of moped, Q

D1

D2

D: DVD player and video discs are also related goods...