In recent years, the number of car producers in China has increased rapidly. In fact, China now has more car brands than the United States. In addition, car sales have climbed every year and automakers have increased their output at even faster rates, causing fierce competition and a decline in prices. At the same time, Chinese consumers' incomes have risen. Assume that cars are a normal good. Draw a diagram of the supply and demand curves for cars in China to explain what has happened in the Chinese car market.

First, we need to define the market we are analyzing. In this case, it is the market for cars in China. Make a note that the demand and supply curves in our diagram will represent the quantity demanded and supplied of cars in China, respectively.

On a piece of paper or digital sheet, draw two axes: the horizontal axis represents the quantity of cars (Q) and the vertical axis represents the price of cars (P). Draw an upward-sloping line representing the initial supply curve (S1) and a downward-sloping line representing the initial demand curve (D1). Label the point where the curves intersect as "A," representing the initial equilibrium quantity (Q1) and price level (P1).

Since the number of car producers has increased and automakers have increased their output at faster rates, it is reasonable to expect an increase in the supply of cars. Draw a new, rightward-shifted supply curve (S2) indicating an increase in supply. The market finds a new equilibrium point, "B," where the demand curve (D1) intersects the new supply curve (S2). The new equilibrium quantity (Q2) is higher than the initial quantity (Q1).

With Chinese consumers' incomes rising and cars being a normal good, the demand for cars is expected to increase. Draw a new, rightward-shifted demand curve (D2) to illustrate this increase in demand. With both increased supply (S2) and increased demand (D2), we find another new equilibrium point, "C." The final equilibrium quantity (Q3) is higher than both Q1 and Q2, indicating that car sales have increased over time.

To understand the decline in car prices, note that at point "B" (with increased supply only), the price has decreased from the initial price level (P1) to a lower price level (P2). However, with both increased supply (S2) and demand (D2), the final equilibrium price level (P3) is higher than P2 but may still be lower than the initial price level (P1), depending on the magnitudes of the shifts in supply and demand curves. In any case, the intense competition in the market is pushing prices downward, as illustrated by moving from P1 to P2, with the changes in demand further affecting the final price level. By following these five steps, you have successfully drawn and analyzed the supply and demand curves for cars in the Chinese market, taking into account the given factors affecting the market.