Chapter 2 Essay

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1. For each of the determinants of demand in Equation 2.1, identify an example illustrating the effect on the demand for hybrid gasoline-electric vehicles such as the Toyota Prius. Then do the same for each of the determinants of supply in Equation 2.2. In each instance, would equilibrium market price increase or decrease? Consider substitutes such as plug-in hybrids, the Nissan Leaf and Chevy Volt, and complements such as gasoline and lithium ion laptop computer batteries.

Qd= f(P, Ps, Pc, Y, A, Ac, N, Cp, Pe, Ta, T/S …)
Equation 2.1 is the demand function. If the quantity demanded is the Toyota Prius, the P is the price of the car and as the price rises we would expect a decline in the quantity sold. Ps is the price of substitutes and as the price of the Chevy Malibu rises we would expect the quantity of the Priuses to rise. Pc is the price of complements and we would expect that as the price of things like replacement batteries rises we would see a decline in the quantity of Priuses sold. Y is income and we’d expect as income rises to sell more Priuses as they are normal goods. A is advertising and we’d also expect more Priuses sold as advertising and promotional expenditures rises. Ac is competitors’ advertising and we’d expect a negative impact on the quantity of the Prius sold as Ac rises. N is the size of the target market or population and we’d expect that larger markets will sell more Priuses. Cp is consumer preferences for greener transportation which should help the Prius seen as being greener. Pe is the expected future price of hybrid cars and wed expect that the greater the resale price of the car that more will wish to buy it. Ta is the purchase adjustment time period that tends to show that more Priuses are sold if the time period permitted for analysis is longer. T/S involves taxes on or subsidies for hybrid cars that we say in periods when there are tax subsidies to buy hybrids that car sales of hybrids rises.

Qs=f(P,P1,Pui, T, EE, F, RC, Pe, T/S …)
Equation 2.2 is the supply function. P is price, P1 is inputs like metal, Pui is the price of unused inputs like fiberglass, T is technological improvement like robotic welding. EE is the entry or exit of other auto sellers. F is the accidental supply interruptions from fires, floods, etc. RC is the costs of regulatory compliance. Pe is the expected future price of the Prius. Ta is the adjustment time period. T/S involves the taxes on or subsidies.

2. Gasoline prices above $3 per
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