Essay Question On Demand And Supply

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When the supply of private cars falls, whether the price or the quantity will change by a larger proportion will depend on the price elasticity of demand.

The price elasticity of demand for a good is a measure of the degree of responsiveness of the quantity demanded to a change in the price, ceteris paribus.

The demand for private cars is likely to be price elastic due to the large proportion of income spent on the goods as they are generally expensive.

Therefore, the quantity is likely to fall by a larger proportion than the rise in the price.

Therefore, the increase in the demand is likely to be greater than the decrease in the supply and hence the quantity is likely to rise.

In the above diagram, a larger increase in the demand (D) from D.

Therefore, they will do so to increase their profits.

As the price rises, the quantity demanded falls and the quantity supplied rises and this process continues until the price rises to P.

The increase in the demand and the decrease in the supply of private cars will both lead to a rise in the price.

Although the increase in the demand will lead to a rise in the quantity, the decrease in the supply will lead to a fall in the quantity.

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