Demand and Supply Curve

Demandand Supply Curve

CourseInstructor

GeneralOverview of Demand and Supply

Theinterplay of demand and supply determine the amount of goods andservices sold to the market. The optimum amount of goods that can beproduce in the economy for market supply should be at theintersection between the supply and the demand curve. The resultingquantity of goods from this intersection is referred to as theoptimum quantity while the resulting price is called the optimumprice (Besanko,Braeutigam and Gibbs).Demand and supply in the market, therefore, determine either theamount of goods produced or the price to be charged on the products.A careful study by investors need to be done in order to avoid oversupply which could be detrimental and the consumers as well monitorthe supply in order to determine the most fair price to be chargedfor the goods sold (Marshall).

Theautomobile market is also one of the most dramatic and is determinedby very many factors. First, it is the price of the specific car orvehicle. Secondly, the demand of vehicles is determined by otherfactors other than the price of the product itself. Some of thesefactors include price of fuel, the amount of associated tax, thevalue and prestige associated with a specific car only to mention buta few. However, each factor tends to affect the demand of products ina different way while others have similar effects on demand andmarket of the products.

ThePrice of Petrol Reduce

Theprice of fuel is one of the major determinants of supply of the carsand the automobile products in general. Cars are run using energygenerated from fuel and, hence, the customers for cars would have toconsider the price of fuel before considering buying a car. Cars arebought mostly to aid in the transportation services for workpurposes. Public and private transportation are the two optionsavailable for the rationale employee to consider for transportationto and from the place of work. If the cost of fuel reduces, thedemand for cars will go up and then if the price of fuel goes higherthan what it is now, the demand for the new cars in the market goesdown

SS

P2

Price of fuel

P1

DD

Q2 Q1

AtP2, the quantity of new cars supplied in the market is Q2. But asevent happen that the price of fuel reduces to the level, let’ssay, P1, the effect on demand for new cars is that there will be anincrease in the demand for the new cars to the extent of Q1. It isimportant to note that the elasticity of demand as a result of changein the supply wave depends on the proportion of change in price(McEachern).

TheGovernment Announces Plans to Extend the Scrappage SchemeIndefinitely

Whenthe government announces a plan to extent the scrappage schemeindefinitely, there will be a variety of option for potential carowners to choose from. The second hand vehicles market will beover-flooded and this will reduce the demand for the purchase of newcars. Since the plan is only announced, people will be forced to halttheir plans of buying new cars awaiting the commencement of theimplementation of the new plan. Purchase of new cars will have towait for the ultimate decision of the government. The price of usedvehicle is always lower as compared to that of the new vehicles andas such people prefer to buy them since the functionality andefficiency is always the same.

SS

Scrappage level

DD

Q2 Q1

AtQ1, the scrappage level is as dictated by the existing policies. Uponannouncement by the government of a plan to suspend or rather extendthe scheme indefinitely, many potential car owners will halt theirplans of buying new cars and wait for the plan to take effect. Themarket for new car will face a reduction in demand and get toquantity Q2 as in the diagram above (Tucker).

ThereIs a fall in the Price of New Cars

Theprice of the product itself is perhaps the easiest relationship toexplain since it follows the typical demand and supply curverelationship. It follows that, when the price of a product goes up,the demand for the same goes down and when the price of a productgoes down, the demand for that product goes up. It is as simple asthat. In our case study, when there is a fall in the price of newcars in the market, customers will react by increasing demand for thenew cars. This is because a reduction enables many more people to beable to afford buying a car. At these lower prices, many will not beconstraint by money and are willing to pay these amounts for buyingthe car. The supply of vehicle will also have to increase in order tomeet the demand that arises and the demand has to be checked in orderto avoid a further drop in price due to ever-supply.

SS

Price

P1

P2DD

Q1 Q2

Whenthe current price of new car is maybe P1, the demand is at Q1. Butwhen the price fall to a level P2 as shown in the diagram, customersreact by demanding for more and the demand will increase to the Q2 asshown in the diagram. More will be demanded if the price of new carfell below its current level.

TheCost of Crude Oil Falls By 20%

Afall in the cost of crude oil by 20% will directly be reflected inthe price of fuel. Crude oil price determine the cost of the fuel atthe pump and , hence, the price of fuel will reduces but notnecessarily by 20% since the cost of refined fuel does not onlydepend on the cost of crude oil. A reduction in the price of crudeoil will mean that the cost of fuel goes downer a little lower and sois the cost of servicing vehicle. The effect would be a slightincrease in demand of new cars in the economy.

SS

Price of crude oil

P1

P2

DD

Q1 Q2

LetP1 be the current price of crude oil in the market. The circumstancesallow demand for new cars to be at quantity Q1. When there is a 20%reduction in the cost of crude oil, the circumstances favor and thedemand for new car goes up to the demand level Q2 as shown in thediagram.

Thefollowing are the acronyms used in full for the purpose of diagram,

DD-Demand curve for new cars

SS-Supply curve for the new cars

Q1-Quantity one for new cars

Q2-Quantity two for new cars

References

Besanko,David, Ronald R Braeutigam, and Michael Gibbs. Microeconomics.Hoboken, NJ: John Wiley, 2011. Print.

Marshall,Alfred. PrinciplesOf Economics.Print.

McEachern,William A. Economics.Mason, OH: South-Western Cengage Learning, 2012. Print.

Tucker,Irvin B. MacroeconomicsFor Today.Mason, OH: South-Western Cengage Learning, 2010. Print.

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