Economics Essay Example | Topics and Well Written Essays - 1000 words - 18

Economics - Essay Example 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. 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. 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