Question

The accompanying table gives the annual U.S. demand and supply schedules for pickup trucks. $$ \begin{array}{c|c|c} & \begin{array}{c} \text { Quantity of } \\ \text { trucks demanded } \\ \text { (millions) } \end{array} & \begin{array}{c} \text { Quantity of } \\ \text { trucks supplied } \\ \text { (millions) } \end{array} \\ \$ 20,000 & 20 & 14 \\ 25,000 & 18 & 15 \\ 30,000 & 16 & 16 \\ 35,000 & 14 & 17 \\ 40,000 & 12 & 18 \end{array} $$ a. Plot the demand and supply curves using these schedules. Indicate the equilibrium price and quantity on your diagram. b. Suppose the tires used on pickup trucks are found to be defective. What would you expect to happen in the market for pickup trucks? Show this on your diagram. c Suppose that the U.S. Department of Transportation imposes costly regulations on manufacturers that cause them to reduce supply by one-third at any given price. Calculate and plot the new supply schedule and indicate the new equilibrium price and quantity on your diagram.

Short answer

In conclusion, the defective tires on the pickup trucks led to a decrease in demand, which can be represented by a leftward shift of the demand curve. The new regulations imposed by the U.S. Department of Transportation caused manufacturers to reduce supply, resulting in a new supply schedule. The new equilibrium price and quantity after the costly regulations were imposed are $35,000 and 14 million pickup trucks, respectively.

Step-by-step solution

a. Plot the demand and supply curves and indicate the equilibrium price and quantity

The first step is to create the demand and supply curves using the given schedules. We can use the price points in the table to plot each curve accordingly. The intersection point of the two curves represents the equilibrium price and quantity. 1. Start by plotting the demand curve using the quantity of trucks demanded at each price. 2. Similarly, plot the supply curve using the quantity of trucks supplied at each price. 3. Locate the intersection point of the two curves to find the equilibrium price and quantity. Demand curve: \(\begin{cases} P = 20,000, & Q = 20 \\ P = 25,000, & Q = 18 \\ P = 30,000, & Q = 16 \\ P = 35,000, & Q = 14 \\ P = 40,000, & Q = 12 \end{cases}\) Supply curve: \(\begin{cases} P = 20,000, & Q = 14 \\ P = 25,000, & Q = 15 \\ P = 30,000, & Q = 16 \\ P = 35,000, & Q = 17 \\ P = 40,000, & Q = 18 \end{cases}\) The equilibrium price and quantity are where the two curves intersect, which is at the point \((16, 30,000)\), meaning the equilibrium price is \(30,000\) and there are 16 million pickup trucks demanded and supplied.

b. Effect of defective tires on the market for pickup trucks

1. If the tires used on pickup trucks are found to be defective, there will most likely be a decrease in the demand for pickup trucks, as consumers may not want to purchase trucks with faulty tires. 2. This decrease in demand can be represented by a leftward shift of the demand curve. 3. The new intersection point represents the new equilibrium price and quantity with the defective tires situation.

c. Calculate and plot the new supply schedule and indicate the new equilibrium price and quantity

1. Calculate the new supply schedule after the imposition of costly regulations by the U.S. Department of Transportation. Since the regulations cause manufacturers to reduce supply by one-third at any given price, we can simply divide the initial quantity supplied by 1.33 (rounded) at each price level. New supply schedule: \(\begin{cases} P = 20,000, & Q = 11 \\ P = 25,000, & Q = 12 \\ P = 30,000, & Q = 12 \\ P = 35,000, & Q = 13 \\ P = 40,000, & Q = 14 \end{cases}\) 2. Plot the new supply curve on the same diagram with the initial demand and supply curves. 3. Determine the new equilibrium price and quantity by finding the intersection point of the new supply curve and the demand curve. In this case, the new equilibrium price and quantity are \(35,000\) and 14 million pickup trucks.

Key concepts

equilibrium price

Understanding the equilibrium price is key to grasping basic economic principles. The equilibrium price occurs where the supply and demand curves intersect. It represents a balance, where the quantity of goods consumers want to buy equals the quantity producers want to sell. In our exercise, this happens at the price point of $30,000 for pickup trucks. At this price, 16 million trucks are both demanded and supplied annually. This balance ensures that there is neither a surplus nor a shortage of pickup trucks in the market. Finding this equilibrium involves plotting the supply and demand curves using price and quantity data. Once plotted, the intersection of these two curves gives us the point of equilibrium. In simpler terms, the equilibrium price is the sweet spot where sellers maximize sales and buyers acquire the goods they demand without shortage or surplus.

market shift

A market shift occurs when there is a significant change in supply or demand within a market. Let’s delve into the defective tire scenario from the exercise. Due to the defect, potential buyers are less willing to purchase pickup trucks. This reluctance shifts the demand curve to the left, indicating a decrease in demand. With lower demand, the new equilibrium is reached at a different price and quantity than initially established. This shift reflects buyers’ hesitance and the reduction in market activity for the trucks affected by the defect. Analyzing how such a shift affects equilibrium helps us understand the delicate balance within a market and why it's important to address issues like product defects quickly to restore equilibrium.

regulatory impact

The impact of regulations can often cause significant changes in market dynamics. In the exercise, the U.S. Department of Transportation imposes costly regulations, leading manufacturers to reduce their supply by one-third at any price. This regulatory move shifts the supply curve to the left. When supply decreases due to increased production costs or other regulatory impacts, the supply curve shifts leftward. The new market equilibrium ends up reflecting a higher price, here $35,000, and a lower quantity, 14 million trucks. By depicting this on a supply and demand diagram, it's clear how regulations directly impact market equilibrium, affecting prices and quantities available in the market. Adjusting to new regulatory standards is crucial for manufacturers as it affects their costs and pricing strategies. Understanding these impacts helps in anticipating market behavior and planning accordingly.