Question

Electric Car Demand Growing, Global Market Hits 740,000 Units Around the world, demand for electric vehicles (EV) is growing according to the Centre for Solar Energy and Hydrogen Research. There have been more than 320,000 new EV registrations in 2014 , bringing the total global market up to 740,000 vehicles. Source: www.cleantechnica.com, March 28,2015 a. Explain the effects of the increase in global demand for electric vehicles on the market for electric vehicles and on an individual electric vehicle producer in the short run. b. Draw a graph to illustrate your explanation in part (a). c. Explain the long-run effects of the increase in global demand for electric vehicles on the market for electric vehicles.

Short answer

Short run: Higher prices and sales. Long run: More competition, supply increases, prices stabilize.

Step-by-step solution

- Identifying Short-run Market Effects

When global demand for electric vehicles increases, the immediate effect on the market is an increase in the quantity demanded at the existing price levels. This leads to higher sales and potentially higher prices for electric vehicles in the short run. This increase in demand shifts the demand curve to the right.

- Effect on Individual Producers in Short-run

For an individual electric vehicle producer, the increase in demand can result in higher sales and profits if they can meet the higher demand. Producers may also temporarily increase prices due to higher demand, leading to higher short-run revenues.

- Drawing the Graph for Short-run Effects

To illustrate these effects on a graph:1. Draw the initial demand curve (D1) and supply curve (S) for electric vehicles, with the equilibrium point (E1).2. Show the new demand curve (D2) shifted to the right, which intersects the supply curve at a new higher equilibrium point (E2).3. Label the axes as 'Price' and 'Quantity' and mark the shifts in the demand curve.

- Long-run Market Effects

In the long run, the increase in demand for electric vehicles can lead to new firms entering the market attracted by the higher profits. This increases competition which can eventually drive down prices and increase the quantity supplied. The supply curve will shift to the right, reaching a new equilibrium with potentially lower prices but higher quantities.

- Long-run Effects on Individual Producers

For individual producers, the long-run effects include increased competition and potentially lower market share. To stay competitive, producers might have to innovate, reduce costs, or improve their products.

Key concepts

Short-run Effects

When demand for electric vehicles (EVs) increases globally, the short-run effects are immediate. The quantity of EVs demanded rises at the existing price levels. Here's what happens in more detail:
1. **Higher Sales & Prices**: The surge in demand means that more vehicles are sold. Due to the higher demand, prices for EVs may also increase temporarily as producers meet the heightened need for their products.
2. **Shift in Demand Curve**: On a demand and supply graph, this scenario is illustrated by a rightward shift of the demand curve, moving from D1 to D2. The initial equilibrium is at E1 where the original demand curve (D1) intersects the supply curve (S). The new equilibrium (E2) features higher prices and a greater quantity of vehicles sold.

For individual EV producers, higher demand can translate to greater sales and increased revenue if they can scale production quickly. However, not all producers might have the production capacity to meet increased demand instantly, which might result in increased prices in the short-run.

Long-run Effects

The long-run effects of increased demand for EVs present a different scenario. Over a longer period, the market adjusts more comprehensively:
1. **New Market Entrants**: Attracted by high profits, new firms may enter the market. This increased competition benefits consumers.

2. **Supply Curve Shift**: The supply curve will shift to the right as new producers enter the market and existing ones increase production. This leads to a new equilibrium with possibly lower prices but higher quantities of EVs available.
3. **Cost Innovations**: With more competition, firms will be pressured to innovate and reduce their production costs, improving efficiency and product offerings.

For an individual producer, the increase in competition may mean lower market share and prices. However, those who innovate and streamline their production processes can capture a significant portion of the expanding market.

Demand and Supply Curves

Understanding the impact of changes in demand and supply involves analyzing their respective curves.
1. **Demand Curve**: This curve slopes downward from left to right, indicating that as the price of EVs decreases, more units are demanded. An increase in demand shifts this curve to the right.
2. **Supply Curve**: This curve slopes upward from left to right, showing that as the price rises, producers are willing to supply more EVs. An increase in supply shifts this curve to the right.
Changes in these curves signify market dynamics. When the demand for EVs grows, the demand curve shifts rightward from D1 to D2. If producers increase their supply, the supply curve shifts rightward from S1 to S2. The new equilibrium point reflects the adjusted price and quantity levels where market forces are balanced.

Market Equilibrium

Market equilibrium occurs where the demand and supply curves intersect. This represents the price at which the quantity of EVs demanded equals the quantity supplied.
1. **Initial Equilibrium**: Before the increase in demand, the market is in equilibrium at point E1, where the original demand curve (D1) and supply curve (S1) intersect.
2. **Short-run Equilibrium**: With increased demand, the new equilibrium point (E2) might show higher prices and more units sold.
3. **Long-run Equilibrium**: Eventually, increased competition and supply shifts the supply curve to the right, creating a new equilibrium (E3) with lower prices and more available EVs.
Market equilibrium is dynamic and continually adjusts based on various factors influencing demand and supply, such as technological advancements, consumer preferences, and global economic conditions.