What effect will each of the following
have on equilibrium price and quantity of large
automobile?
a. A technological advance in the methods
manufacturing automobile.
b. An increase in the number of firms in the
automobile industry.
c. An increase in the prices of steel and tires used
in the production of automobile.
d. The expectation that the equilibrium price of
automobiles will be higher in the future than
currently.
e. An increase in the price of the small
automobiles (with no change in the price of large
automobiles).
f. The levying of a per-unit tax on each
automobiles sold.
g. The granting of a 500$-per-unit subsidy for
each automobiles produced
Answers
Answer and Explanation:
a) Quantity increases, Price decreases.
When there is a technological advance, the productivity of capital increases, this results in more goods being produced at the same cost. This increases the supply, while reducing the average cost and therefore, the price will decrease.
b) Quantity increases, Price decreases.
When the number of firms in any industry increases, the market supply will increase, as a result of supply being more than demand, the prices will decrease.
c) Quantity decreases, Price increases.
When there is an increase in the prices of raw materials, the overall cost of production will increase. This will result in production of lower quantity at the earlier cost. Thus, the supply will fall, while the demand remains high. Demand being higher than supply will cause an increase in the prices.
d) Supply is reduced, while demand is increased, the prices increase to restore the equilibrium.
When the suppliers expect that the prices will increase in the near future, they will hoard the stock at present so they can sell at higher prices when the price does increase. But the consumers will want to buy more right now when the prices are lower, so the demand will increase. Demand being more than supply, the prices will rise to restore equilibrium.
e) Supply will shift from large to small automobiles, while demand will shift from small to large automobiles. This will result in prices of small automobiles being reduced and that of large automobiles being increased.
Suppliers will want to supply more of what is expensive so they can earn more. Thus, when the relative prices of small automobiles increase, they will shift their supply focus from large to small automobiles. However, the consumers will want more of what is relatively cheaper. So they will demand more of large automobiles.
Thus, in case of small automobiles, supply will be more than demand, causing prices to fall to restore equilibrium.
And in case of large automobiles, demand will be more than supply, causing prices to rise to restore equilibrium.
f) Quantity decreases, Price increases.
Levying of tax increases the per unit cost for the producers. So, less quantity will be supplied at the same cost.
However, This increase in cost, they will eventually add to the price of the final product and shift the burden to the consumers.
So the price will rise.
g) Quantity increases, Price decreases.
Subsidy is any grant or help that the government gives to producers of certain commodities. With this, the cost of production will decrease for them. So they will be able to produce and supply more. Also, this will reduce the final price of the product.