The Modern Equilibrium Theory of Unemployment, Interests, and Assets - Essay Example

Running Head: [short [institute of affiliation Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new mid-size automobiles when household incomes increase. When household incomes increase, there is increase in overall demand, therefore the demand curve shifts to the right. This shift in the demand curve to the right causes the equilibrium to settle into both higher price and higher quantity. Household incomes are a factor in influencing demand. Because the increase in household incomes signifies an increase in the purchasing power among consumers, for every price level of automobiles, households will demand a greater quantity. The increase in purchasing power does not cause a movement along the demand curve; rather, it causes a shift in the demand curve to the right. With the demand curve shifting to the right, a new equilibrium is established. Since the supply curve is not affected in this situation, assuming all things are constant, and as there is no influences to cause it to shift to any direction, the new equilibrium price and quantity is established. The new equilibrium price and quantity is now higher than the equilibrium quantity and price before the increase in income happens. 2. Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new mid-size automobiles when consumers demand fewer SUV’s. SUVs are a somehow an alternative to the midsize automobiles, therefore SUVs are related goods to midsize automobiles. This influence in the prices of related goods, which is traced back from the fewer demands, has an effect on the supply curve of midsize automobiles, therefore has an effect on equilibrium price and quantity. When the demand for SUVs decreases, that is consumers demand fewer units of it, the price of it falls. There is a significant shift in the demand curve of SUVs to the left, where the equilibrium settles at the lower price and lower quantity supplied. This fall in the price of the SUV has a significant effect on the midsize automobile market. Because midsize automobile are alternatives to SUVs, when the price of SUV falls due to lower demand, firms will shift their investment to the more profitable ones, that is, if firms are supplying SUVs and midsize automobiles, midsize automobiles will get the shift in investment. Because of this shift in investment, the midsize automobile will experience a shift in the supply curve to the right. A shift in the supply curve to the right brings the equilibrium point to a lower equilibrium price, but higher in quantity. 3. Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new mid-size automobiles when the price of steel decreases. The price of steel is crucial in the manufacture of mid-sized automobiles. Because steel is an input to the manufacture of automobiles, this has a significant effect on the supply curve. This decrease in the price of steel means that for every automobile that a firm manufactures, the production cost for that automobile is lower. Because of the lower cost due to the price of steel, a firm’s production budget will enable it to produce more automobiles. Therefore, a decrease in the price of steel increases the overall supply in the market—a shift in the supply curve to the right. A shift in the supply curve to the right means that for every given price level, the quantity a firm wants to supply has increased. Thus, this shift in the supply curve to the right, assuming all things are constant, will push the new equilibrium level to the right. The decrease in the price of steel signifies a shift in the supply curve to the right, thus, the new equilibrium price will be lower and the new equilibrium quantity higher. 4. Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new mid-size automobiles when interest rates decrease. The decrease in interest rates has an effect at least on the demand side of the market. This is because, as demand, in the modern times is no longer solely influenced by income alone as there are other sources of financing. This decrease in interest rates increases the demand for midsize automobiles, or causes a shift to the right of the demand curve. As demand is determined by purchasing power, people’s purchasing power nowadays no longer rests on their incomes alone. As other methods of financing are now available such as loans from banks, the purchasing power of the people is also dependent on their future, not just actual purchasing power which determines their credit standing. This credit standing allows consumers to borrow from the bank, and demand for the goods that they want. This decrease in interest rates makes the purchase of the automobiles more affordable, at least in terms of the additional payment due to interest rates. Therefore, this causes a shift of the demand curve to the right, thus, bringing the new equilibrium point to a higher price, but also at a higher quantity. 5. Suppose a quota is placed on the import of foreign made mid-size automobiles and as a result the price of these automobiles is fixed above the equilibrium price. Demonstrate using supply and demand analysis, the impact on the equilibrium price and quantity of new domestically made mid-size automobiles. Trade barriers create a distortion in the economy in that it affects the equilibrium price and quantity in the market. In a situation where a quota is placed on the import of foreign-made mid-size automobiles, the price is fixed above the equilibrium price. This situation does not create a shift in either the demand curve or the supply curve. By putting a fixed price above the equilibrium point, a surplus in the market becomes the effect. Higher price above the equilibrium point, assuming all things are constant, means lower in quantity demanded but higher quantity supplied. New domestically-made midsize automobiles will increase in quantity supplied at a higher price. Because firms would want to supply more at a higher price, but consumers demand fewer—there becomes a surplus. The new equilibrium price will be the price of the foreign-made cars; the new equilibrium quantity will be the quantity that meets the demand, for after all, it would be the quantity that would be bought by consumers. Reference List Appleyard, Field, & Cobb., (2006), International Economics (5th ed.). McGraw-Hill Irwin Barro, R. J., (1997). Macroeconomics. 5th ed. Cambridge, Massachusetts: MIT Press. Phelps, E., (1994). Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interests, and Assets. Cambridge, Massachusetts: Harvard University Press,. Samuelson, P. A. & Nordhaus, W. D., (2004), Economics (International Ed.). McGraw-Hill Irwin. Read More