3. Determinants of demand The following graph shows the demand curve for sedans (for example, Toyota Camrys or Honda Accords) in New York City. For simplicity, assume that all sedans are identical and sell for the same price. Initially, the graph shows market demand under the following circumstances: Average houschold income is $50,000 per year, the price of a gallon of regular unleaded gas is S4 per gallon, and the price of a subway ride is $2.00. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool Demand for Sedans Demand for Sedans 40 Price of a sedan Thousand of dollars 20 Quantity Demanded Sedans per monrh) 450 30 Demand Shifters 20 Average Income Thousands of dollars) Price of Gas Dollars per galion) Price of a Subway Ride Dollars 50 10 and 0 100 200 300 400 500 600 700 800 90O QUANTITY (Sedans per month) Consider the graph. Suppose that the price of a sedan increased from $15000 to $20,000. This would cause a the demand curve. An increase in average income causes a the demand curve; therefore, you may conclude that sedans are good. (Hint: Try substituting different values for Average Income in the graph input tool and observing what happens.) Suppose that the price of a subway ride rises from $2.00 to $2.50. Because driving a car and taking the subway are , an increase in the price of a subway ride shifts the demand curve for sedans to the Grade It Now Save & Continue Continue without saving
It has been provided that the price of a sedan has increased from $15,000 to $20,000.
When price of a commodity increases, its quantity demanded decreases.
When quantity demanded decreases, there is upward movement along the demand curve.
Thus,
Suppose that the price of a sedan increases from $15,000 to $20,000. This would cause a upward movement along the demand curve.
Change in income brings shift in the demand curve. When increase in income leads to rightward shift in the demand curve then in that case demand is said to have increased.
If demand of a good increases with increase in income then such good is a normal good.
Thus,
An increase in average income causes a rightward shift in the demand curve, therefore, you may conclude that sedans are normal good.
There exists an direct relation between substitute goods.
Thus,
Suppose that the price of a subway rise rises from $2 to $2.50. Because driving a car and taking the subway are substitutes, an increase in the price of a subway ride shifts the demand curve for sedans to the right.
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