Essay Question On Demand And Supply

The above events will also affect the market for petrol which is related to private cars.Private cars and petrol are complements and hence the increase in the demand for private cars will lead to an increase in the demand for petrol.

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In the above diagram, due to the elastic supply which gives rise to the relatively flat supply curve (S and this results in a shortage.

When firms do not produce enough to sell, they can raise the price without losing sales.

The supply of private cars is likely to be price elastic as the production time is likely to be short given that they are mass produced on assembly line which is highly automated.

Therefore, the quantity is likely to rise by a larger proportion than the price.

When national income rises, whether the demand for a good will rise or fall will depend on the income elasticity of demand.

The income elasticity of demand for a good is a measure of the degree of responsiveness of the demand to a change in income, ceteris paribus.As the increase in national income is large as evidenced in the preamble and the income elasticity of demand for private cars is high, the increase in the demand is likely to be large.Furthermore, as the increase in oil prices is likely to be small given that they have only started rising, the decrease in the supply likely to be small.The demand for private cars is likely to be price elastic due to the large proportion of income spent on the goods as they are generally expensive.Therefore, the quantity is likely to fall by a larger proportion than the rise in the price.The increase in the demand and the decrease in the supply of private cars will both lead to a rise in the price.Although the increase in the demand will lead to a rise in the quantity, the decrease in the supply will lead to a fall in the quantity.A rise in oil prices will lead to a decrease in the supply of private cars.The supply of a good is the quantity of the good that firms are able and willing to sell at each price over a period of time, ceteris paribus.Therefore, the increase in the demand is likely to be greater than the decrease in the supply and hence the quantity is likely to rise.In the above diagram, a larger increase in the demand (D) from D.

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