Chapter 14: Problem 544

As the price of gasoline rises, what should we expect to happen to the demand for big "gas-guzzling" cars? Illustrate with supply and demand curves.

Short Answer

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As gasoline prices rise, we can expect the demand for big gas-guzzling cars to decrease. This is because gasoline and cars are complementary goods, and the higher cost of gasoline makes these cars less attractive to consumers. The effect can be illustrated by a leftward shift of the demand curve. The new equilibrium point will show a lower quantity of big gas-guzzling cars being sold at a lower price. To illustrate this change, we can show the supply and demand curves before and after the increase in gasoline prices, highlighting the decreased demand for these cars.

Step by step solution

Understand the concept of complementary goods

Complementary goods are goods that are usually consumed together. In this case, gasoline and cars are complementary goods because you need gasoline to operate a car. When the price of a complementary good changes, it can affect the demand for the related good.

Draw the initial supply and demand curves

Before analyzing the effect of a rise in gasoline prices, we should draw the initial supply and demand curves for big gas-guzzling cars. To do this, place the quantity of cars on the horizontal axis (X-axis) and the price of cars on the vertical axis (Y-axis). The demand curve has a negative slope (because as the price of a good increases, the quantity demanded decreases). The supply curve has a positive slope (because as the price of a good increases, the quantity supplied increases).

Analyze the effect of a rise in gasoline prices on the demand for cars

When the price of gasoline increases, the cost of operating a big gas-guzzling car also increases. This makes these cars less attractive to consumers, and as a result, demand for these cars decreases. In terms of the demand curve, this can be illustrated as a leftward shift of the entire curve.

Identify the new equilibrium point

After the demand curve has shifted to the left due to the rise in gasoline prices, there will be a new equilibrium point where the new demand curve intersects the supply curve. This new equilibrium point will show a lower quantity of big gas-guzzling cars being sold at a lower price.

Illustrate the change in the market for big gas-guzzling cars

To summarize our findings, we should show the supply and demand curves before and after the increase in gasoline prices, as well as the initial and new equilibrium points. In doing so, we can clearly see the decreased demand for big gas-guzzling cars as a result of the higher gasoline prices.