Chapter 4, Problem 3PA

Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans.

a. People decide to have more children.

b. A strike by steelworkers raises steel prices.

c. Engineers develop new automated machinery for the production of minivans.

d. The price of sports utility vehicles rises.

e. A stock market crash lowers people’s wealth.

To determine

Demand and supply, its determinants and its effect on price and quantity.

Explanation of Solution

Figure 1 illustrates the change in equilibrium due to shift in the demand curve.

If people decide to have more children, then they would require larger vehicles for transporting their kids around. This results in an increase in the demand for minivan, while the supply curve remains unaffected. The result is a rise in both the price and the quantity sold. Figure 1 illustrates shift in the demand curve of minivans due to the increased children. The vertical axis represents the price of minivans and the horizontal axis represents the quantity demanded and supplied of minivans. The rightward shift of demand curve causes an increase in both the equilibrium quantity and price of minivans.

Economics Concept Introduction

Concept Introduction:

Quantity demanded: It is the amount of a good that buyers are willing and able to purchase in the market.

Demand curve: It shows how the quantity of a good demanded depends on the price.

Supply curve: It shows how the quantity of a good supplied depends on the price.

Quantity supplied: It is the amount of a good that sellers are willing and able to sell in the market.

Substitutes: Two goods are considered substitutes if an increase in the price of one good lead to an increase in the demand for the other.

Equilibrium price: It is the price at which the quantity demanded of a good or service is equal to the quantity supplied.

To determine

Demand and supply, its determinants and its effect on price and quantity.

Explanation of Solution

Figure 2 illustrates the change in equilibrium due to shift in the supply curve.

Figure 2 illustrates the change in demand and supply of minivans when the price of steel rises. The vertical axis represents the price of minivans and the horizontal axis represents the quantity demanded and supplied of minivans. From Figure 2, it can be inferred that when the price of steel rises as a result of strike by steelworkers, the supply curve of minivans shifts leftwards because an increase in steel price is an increase in cost of producing a minivan. But there will be no shift in demand curve. The leftward shift of supply curve causes a decline in the equilibrium quantity sold with a rise in the equilibrium price of minivans.

Economics Concept Introduction

Concept Introduction:

Quantity demanded: It is the amount of a good that buyers are willing and able to purchase in the market.

Demand curve: It shows how the quantity of a good demanded depends on the price.

Supply curve: It shows how the quantity of a good supplied depends on the price.

Quantity supplied: It is the amount of a good that sellers are willing and able to sell in the market.

Substitutes: Two goods are considered substitutes if an increase in the price of one good lead to an increase in the demand for the other.

Equilibrium price: It is the price at which the quantity demanded of a good or service is equal to the quantity supplied.

To determine

Demand and supply, its determinants and its effect on price and quantity.

Explanation of Solution

Figure 3 illustrates the change in equilibrium due to shift in the supply curve.

The development of new automated machinery for the production of minivans increases the supply of minivans with a reduction in its cost of production due to improved technology. This is illustrated in Figure 3, where the horizontal axis represents the quantity demanded and supplied of minivans, while the vertical axis represents the price. This reduction in firms' costs will result in an increase in supply causing it to shift to the right; but the demand remains unaffected. The eventual result is a decline in the equilibrium price of minivans and an increase in the quantity sold.

Economics Concept Introduction

Concept Introduction:

Quantity demanded: It is the amount of a good that buyers are willing and able to purchase in the market.

Demand curve: It shows how the quantity of a good demanded depends on the price.

Supply curve: It shows how the quantity of a good supplied depends on the price.

Quantity supplied: It is the amount of a good that sellers are willing and able to sell in the market.

Substitutes: Two goods are considered substitutes if an increase in the price of one good lead to an increase in the demand for the other.

Equilibrium price: It is the price at which the quantity demanded of a good or service is equal to the quantity supplied.

To determine

Demand and supply, its determinants and its effect on price and quantity.

Explanation of Solution

Figure 4 illustrates the change in equilibrium due to shift in the supply curve.

The rise in the price of sport utility vehicles affects the demand of minivans because sport utility vehicles are the substitutes for minivans. This is illustrated in Figure 4 where the vertical axis represents the price of minivans and the horizontal axis represents the quantity demanded and supplied of minivans. From Figure 4, it can be inferred that when the price of sport utility vehicles rise, the demand for minivans increases, since they are substitutes. This result in shift of demand curve rightwards because the higher price of sport utility vehicles will lead consumers to buy more minivans, but there will be no shift in the supply. The rightward shift of demand curve increases both the equilibrium price and equilibrium quantity of minivans.

Economics Concept Introduction

Concept Introduction:

Quantity demanded: It is the amount of a good that buyers are willing and able to purchase in the market.

Demand curve: It shows how the quantity of a good demanded depends on the price.

Supply curve: It shows how the quantity of a good supplied depends on the price.

Quantity supplied: It is the amount of a good that sellers are willing and able to sell in the market.

Substitutes: Two goods are considered substitutes if an increase in the price of one good lead to an increase in the demand for the other.

Equilibrium price: It is the price at which the quantity demanded of a good or service is equal to the quantity supplied.

To determine

Demand and supply, its determinants and its effect on price and quantity.

Explanation of Solution

Figure 5 illustrates the change in equilibrium due to shift in the supply curve.

The stock market crash reduces the wealth of people, which in turn reduces their income. This reduces the demand of minivans because minivans are likely a normal good. This is illustrated in Figure 5 where the vertical axis represents the price of minivans and the horizontal axis represents the quantity demanded and supplied of minivans. From Figure 5, it can be inferred that when the income falls, the demand for minivans decreases since they are resulting in shift of demand curve leftwards, but there will be no shift in supply. The leftward shift of demand curve reduces both the equilibrium price and equilibrium quantity of minivans.

Economics Concept Introduction

Concept Introduction:

Quantity demanded: It is the amount of a good that buyers are willing and able to purchase in the market.

Demand curve: It shows how the quantity of a good demanded depends on the price.

Supply curve: It shows how the quantity of a good supplied depends on the price.

Quantity supplied: It is the amount of a good that sellers are willing and able to sell in the market.

Substitutes: Two goods are considered substitutes if an increase in the price of one good lead to an increase in the demand for the other.

Equilibrium price: It is the price at which the quantity demanded of a good or service is equal to the quantity supplied.