Question

What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Fiat \(500 ?\) LO3.2 a. Small automobiles become more fashionable. b. The price of large automobiles rises (with the price of small autos remaining the same). c. Income declines and small autos are an inferior good. d. Consumers anticipate that the price of small autos will greatly come down in the near future. e. The price of gasoline substantially drops.

Short answer

Demand increases for small autos in scenarios a, b, and c, while it decreases in scenarios d and e.

Step-by-step solution

Analyzing Fashion Trends

When small automobiles like the Mini-Cooper and Fiat 500 become more fashionable, consumer preferences shift in favor of these cars. As a result, the demand curve for small automobiles shifts to the right, indicating an increase in demand.

Impact of Substitute Prices

The increase in the price of large automobiles makes small automobiles relatively cheaper alternatives. Therefore, consumers might choose to buy more small automobiles, shifting the demand curve to the right, meaning demand increases as a result.

Income Effect on Inferior Goods

If small autos are considered inferior goods, a decline in consumer income leads to an increased demand for these cars because consumers tend to purchase more inferior goods when income is lower. The demand curve shifts to the right.

Expectations of Future Prices

If consumers anticipate that prices for small autos will decrease significantly in the future, they might decide to delay their purchases. This expectation causes a decrease in current demand, shifting the demand curve to the left.

Effect of Gasoline Prices

A substantial drop in gasoline prices reduces the overall cost of operating larger vehicles, which may cause a decrease in demand for more fuel-efficient small automobiles. As a result, the demand curve for small automobiles shifts to the left, indicating a decrease in demand.

Key concepts

Inferior Goods

An 'inferior good' is a type of good for which demand increases when consumer income falls, and conversely, demand decreases when income rises. This concept might seem counterintuitive at first, but it's essential to understand the distinctive characteristics that define inferior goods.

Small automobiles like the Mini-Cooper and Fiat 500 can sometimes be considered inferior goods, especially during economic downturns. When a person's income decreases, they might forego more expensive alternatives like larger automobiles or luxury cars and instead opt for smaller, more economical models. This shift in purchasing behavior results in an increase in demand for these small cars as incomes decline.

Recognizing this relationship helps in predicting how economic changes, particularly shifts in income, can affect the market for small automobiles and similar products.

Substitute Goods

Substitute goods are products that can replace one another to satisfy similar needs or desires in consumers. The classic examples include butter and margarine, or tea and coffee.

In the context of automobiles, small cars can act as substitutes for larger vehicles. If the price of large automobiles rises, making them less affordable, consumers are likely to consider switching to smaller cars as substitutes. This is because small cars become relatively more attractive in price terms, meeting a similar requirement at a lower cost.

Such price changes can lead to a noticeable shift in demand. As more consumers opt for the cheaper alternative—small automobiles in this case—the demand curve for small cars shifts to the right, demonstrating an increase in demand.

Consumer Preferences

Consumer preferences describe how and why consumers choose between different products or services. These preferences can be influenced by various factors such as trends, culture, and individual tastes.

For example, consider the situation where small automobiles like the Mini-Cooper become more fashionable. If these cars gain popularity due to their design, fuel efficiency, or other appealing features, consumer preferences will shift accordingly. As a result, more people will want to purchase small automobiles, which increases the demand for these vehicles.

When consumer preferences change positively towards a product, the demand curve for that product moves to the right. Understanding consumer preferences is crucial for manufacturers and retailers as it helps in aligning their offerings with market demand.

Income Effect

The 'income effect' describes how changes in a consumer's income influence their purchasing decisions. It can lead to varying effects on the demand for different types of goods depending on whether they are normal or inferior goods.

For normal goods, an increase in income results in an increased demand, and vice versa. However, for inferior goods, the reverse is true: consumers purchase more of these goods when their income decreases. This is a critical element in understanding consumer behavior related to economic shifts.

In terms of small automobiles, if they are classified as inferior goods, a decline in income will cause a bump in demand for these vehicles, as consumers may choose them over more expensive cars. This nuanced reaction showcases the importance of the income effect in economic analyses and planning.