Micro Essay Example | Topics and Well Written Essays - 1000 words

Micro - Essay Example This will raise the price of gasoline and as a result its quantity demanded will also be decreased (as quantity demanded decreases when price increases owing to the law of demand). In this way, the equilibrium quantity of gasoline will reduced to the new level Q’ and equilibrium price will be raised to P’. Price S’ S D Q’ Q Quantity The impact of increase in equilibrium prices of gasoline can be traced to the consumers of gasoline i.e. automobile owners. As far as the Luxury cars are concerned, which are not so fuel-efficient, the owners of Luxury cars will face increase in operational cost of their automobiles. Thus, the increase in price of gasoline will decrease the quantity demanded for gasoline and so will also decrease the demand for Luxury cars – perfect complement for gasoline. Graphically, in the Luxury car market, the demand curve of Luxury cars will shift leftward and now there is lesser demand of Luxury cars at each unit of their prices. Given the supply of Luxury cars, the leftward shift in their demand will decrease the equilibrium quantity of Luxury cars since the decrease in their demand will lead to excess supply of Luxury cars which will put downward pressure on their price and as a result their quantity supplied will also be decreased (as quantity supplied decreases when price decreases owing to the law of supply). In this way, the equilibrium quantity of Luxury cars will be reduced to the new level Q’ and equilibrium price will be decreased to P’. Price S D’ D Q’ Q Quantity The same impact can also be traced to the market of Economy cars which are fuel-efficient. Since the increase in price of gasoline will decrease the demand of Luxury cars, the consumers will tend to switch to the less-expensive alternative – Economy cars. Since Economy cars are the substitutes of Luxury cars, decrease in demand of Luxury cars will increase the demand of Economy cars. Graphically, in the Economy car market, the demand curve of Economy cars will shift rightward and now there is more demand of Economy cars at each unit of their prices. Given the supply of Economy cars, the rightward shift in their demand will increase the equilibrium quantity of Economy cars since the increase in their demand will lead to a situation of ‘excess demand’ of Economy cars which will put upward pressure on their price and as a result their quantity supplied will also be increased (as quantity supplied increases with price). In this way, the equilibrium quantity of Economy cars will be increased to the new level Q’ and equilibrium price will also be increased to P’. Price S D D’ Q. Q’ Quantity Question 2 Price a S b Price Ceiling D QS QD Quantity At the binding price ceiling – which is the maximum price set below the equilibrium price – suppliers can't charge what they had been. Consequently, some suppliers exit the industry and thus s upply is decreased. In this way, there will be inefficiency in the market as it will prevent some sellers from selling their good to buyers who value the good higher than their cost ("Price ceiling" Wikipedia.org). On the other hand, consumers can now buy the product for less, so quantity demanded increases. This will cause a  shortage since quantity demanded exceeds quantity supplied. Since producer surplus is area above the supply curve and