Answer to Question #126877 in Microeconomics for huma

Question

“A market research agency reported that the price for new automobile is likely to increase between March 2012 and December 2012 in a city of Budapest due to expected increase in population. Responding to this study most of the automobile dealers increased their order from the manufacturers. But despite the increase in both demand and supply the price of cars decreased in the market over time.” -Use a market equilibrium graph over time to analyze the situation. Explain.

Answer 1

In the above figure, the demand function is shown in purple and supply is shown in green. Conditional data for March are shown with thin lines, and for December - with thick lines. As you can see, the increase in supply and demand led to an increase in the number of purchased cars and a decrease in prices.