What effect will each of the following have on the demand...

What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Fiat $500 ?$ LO3.2 a. Small automobiles become more fashionable. b. The price of large automobiles rises (with the price of small autos remaining the same). c. Income declines and small autos are an inferior good. d. Consumers anticipate that the price of small autos will greatly come down in the near future. e. The price of gasoline substantially drops.

What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Fiat $500 ?$ LO3.2
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of small autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate that the price of small autos will greatly come down in the near future.
e. The price of gasoline substantially drops.

Key Concepts

Complementary Goods

Complementary goods are products that are consumed together. Changes in the price of a complementary good, such as gasoline, can affect the demand for related goods. For instance, a substantial drop in gasoline prices might lessen the attractiveness of fuel-efficient small cars, potentially reducing their demand.

Future Price Expectations

Consumers' expectations about future prices can influence current demand. If buyers anticipate that a product’s price will drop in the near future, they may postpone their purchases, leading to a decline in current demand.

Consumer Tastes and Preferences

This concept involves the way that shifts in consumer perceptions, trends, and preferences directly affect demand. When a product becomes more fashionable or more desirable to consumers, the demand for that product increases at every price level.

Substitute Goods

Substitute goods are products that can replace each other in consumption. When the price of one good, such as a large automobile, rises, consumers may shift their demand toward a substitute, such as a small automobile, thereby increasing its demand.

Inferior Goods

Inferior goods are goods for which demand increases as consumer income declines, because consumers switch to these lower-priced alternatives when they cannot afford more expensive substitutes. Recognizing a product as an inferior good explains why its demand might rise in a recession.

Transcript

00:02 Okay, so we're trying to figure out what the effect of each of the following scenarios will be on the demand of small cars.

00:09 We'll start off with our supply and demand curve.

00:13 We have price per car and quantity of cars.

00:18 So we'll only write down the demand curve because that's what this question will focus on.

00:23 When there's an increase for demand, there will be a right -word shift of the curve.

00:34 When there is a decrease in demand, there will be a leftward shift.

00:54 So when we're trying to figure out which way the curve will, the demand curve will shift, we're looking at things like income increasing or decreasing.

01:04 Is it a normal good or an inferior good? we're also looking at the price of substitute and complementary goods, taste and preferences, future expectations, number of buyers.

01:16 And various other things too.

01:19 So in scenario a, we have small cars becoming more fashionable.

01:27 So in this case, demand will increase because since small cars are being more fashionable, that means that they're more preferred.

01:34 And if they're more preferred, then that means demand for them will increase, and this will lead to a shift of the curve to the right.

01:42 So we have an increase in demand.

01:51 And in scenario b, we have the price of large cars increasing.

01:58 So large cars are a substitute for small cars.

02:03 And this will lead to an increase in demand for small cars.

02:08 Because when the price of one substitute increases, the demand for the other substitute will increase.

02:17 So again, the price of a substitute good if it increases, and the demand, for the other substitute good will increase...

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