Question

Show graphically how each of the following will affect demand curve for Honda cars and why:

a. Ford introduces a new line of smaller, fuel-efficient cars similar to Honda

b. Honda offers a temporary rebate on cars

c. Newsweek does a cover story unfavourable to Hondas

d. Price of gasoline goes up

f. Honda produces less cars

Answer 1

A. When Ford introduces small car which is fuel efficient. This will shift the demand curve of Honda cars leftward since consumers will prefer a fuel efficient car. Hence, demand of Ford will increase and demand of Honda cars will decline.

B. When Honda offers a temporary rebate on its cars. Then, the consumers will adjust to this offer and will shift along the original demand curve. That is the consumers will move along the demand curve. Since, it is temporary rebate therefore a lower price will attract more customers but only along the original demand curve. Here we consider before the rebate consumer equilibrium was at B after the rebate they were at A. Thus, quantity demanded has increased.

C. When an unfavourable story is published in that case the cars of Honda will not be considered a good buy. Hence the consumers will switch to some other product. Hence shift in demand curve.

D. Price of Gasoline increase. As we know gasoline is a complement to cars therefore an increase in price of Gasoline will reduce the quantity of cars demanded. As the price of gasoline increases less number of cars will be demanded. That is demand will move along the original demand curve.

E. Honda produces less cars then they will be supplying less car into the market. That is the supply curve will shift to its left.

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