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Assume initial equilibrium in the domestic automobile market
Assume initial equilibrium in the domestic automobile market. Using supply and demand analysis explain what will happen to both the equilibrium price and quantity if the following happens:
You hear on the news that a major technology breakthrough for producing automobiles has happened
Expert Solution
Equilibrium price will decline while the equilibrium quantity will increase.
On the graph below, let assume our initial equilibrium point is e. At this point, the equilibrium price is Pe whereas the equilibrium quantity is Qe. However, when a new technology for generating automobiles is discovered, the supply of vehicles in the domestic automobile market will increase. The increase in the supply of cars is demonstrated by the change in supply curve from S0 to S1. This change lowers the equilibrium price from Pe to P0 and increases the equilibrium quantity from Qe to Q0.
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