Chapter 2, Problem 1E

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.

To determine

The impact of various factors on the demand, supply, and equilibrium price of hybrid gasoline-electric vehicles like Toyota Prius with the help of given supply and demand function.

Explanation of Solution

The demand curve is the graphical representation of quantity demanded by a consumer at a given price level. The changes in quantity demanded on the demand curve can be determined in two ways.

• Movement along the demand curve: this happens when the price of commodity change while keeping another factor constant. A rise in price leads to an upward movement along the demand curve whereas, when the price falls it leads to a downward movement along the demand curve. 
• The shift in the demand curve: when factors other than price changes, demand curve shift either right or left

The demand function for Toyota prius can be expressed as:

  $Q_D=f\left(P,P_S,P_C,Y,A,A_C,N,C_P,P_E,T_A,T/S\mathrm{...}\right)$

Here, Q_D = quantity demanded of Toyota Prius,

P = price of Toyota prius,

P_S = price of Nissan leaf, it is substitutes of Toyota prius,

P_C = price of gasoline, which is complementary good for Toyota prius,

Y = income of consumers

A = advertising and promotion expenditures by Toyota

A_C = competitors’ advertising and promotion expenditures

N = size of the potential target market

C_P = consumer tastes and preferences for Toyota,

P_E = expected future price appreciation or depreciation Toyota prius,

T_A = purchase adjustment time period

T/S = taxes or subsidies on Toyota.

As demand for good increases (decreases), it will lead to increase (decrease) the equilibrium price of that good.

These are the factors that can impact the demand for Toyota prius (TP) in following manner:

Factors	Result of change in factors	Equilibrium price: increase or decrease.
Increase (decrease) in price of Toyota prius	Decrease (increase) in quantity demanded for TP.	-
Increase (decrease) in price of Nissan leaf	Increase (decrease) in demand for TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in price of gasoline	Decrease (increase) in demand for TP.	Decrease (increase) in equilibrium price of TP.
Increase (decrease) in income of consumers	Increase (decrease) in demand for TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in advertising and promotion expenditures by Toyota	Increase (decrease) in demand for TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in competitors’ advertising and promotion expenditures	Decrease (increase) in demand for TP.	Decrease (increase) in equilibrium price of TP.
Increase (decrease) in size of the potential target market	Increase (decrease) in demand for TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in consumer tastes and preferences for Toyota	Increase (decrease) in demand for TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in expected future price appreciation or depreciation Toyota prius	Increase (decrease) in demand for TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in purchase adjustment time period	Increase (decrease) in demand for TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in taxes or subsidies on Toyota.	Decrease (increase) in demand for TP. Because of tax, price of TP rises and as a result demand will fall.	Decrease (increase) in equilibrium price of TP.

With the help of following graph, the increase and decrease in demand for TP can be seen. As demand for TP increases, the demand curve shifts to the right from D1 to D2. And as demand for TP fall, the demand curve shifts to the left from D1 to D3.

  

The supply curve is the graphical representation of quantity supplied by a producer at a given price level.

The supply function for Toyota prius (TP) can be expressed as:

  $Q_S=f\left(P,P_I,P_{UI},T,EE,F,RC,P_E,T_A,T/S\mathrm{...}\right)$

Here, Qs = quantity supplied of TP

P = price of the TP

P_I = price of inputs like sheet metal

P_UI = price of unused substitute inputs like fiberglass

T = technological improvements

EE = entry or exit of other auto sellers

F = accidental supply interruptions from fires, floods, etc.

RC = costs of regulatory compliance

P_E = expected (future) changes in price

T_A = adjustment time period

T/S = taxes or subsidies

As supply of good increases (decreases), it will lead to decrease (increase) the equilibrium price of that good.

These are the factors that can impact the demand for Toyota prius (TP) in following manner:

Factors	Result of change in factors	Equilibrium price: increase or decrease.
Increase (decrease) in price of Toyota prius	Increase (decrease) in quantity supplied for TP.	Decrease (increase) in equilibrium price of TP.
Increase (decrease) in price of inputs like sheet metal	Decrease (increase) in supply of TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in price of unused substitute inputs like fiberglass	Decrease (increase) in supply of TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in technological improvements	Increase (decrease) in supply of TP.	Decrease (increase) in equilibrium price of TP.
Increase (decrease) in entry or exit of other auto sellers	Increase (decrease) in supply of TP.	Decrease (increase) in equilibrium price of TP.
Increase (decrease) in accidental supply interruptions from fires, floods, etc.	Decrease (increase) in supply of TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in costs of regulatory compliance	Decrease (increase) in supply of TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in expected (future) changes in price	Decrease (increase) in supply of TP.	Increase (decrease) in equilibrium price of TP.
Increase (decrease) in adjustment time period	Increase (decrease) in supply of TP.	Decrease (increase) in equilibrium price of TP.
Increase (decrease) in taxes or subsidies on Toyota.	Decrease (increase) in supply of TP.	Increase (decrease) in equilibrium price of TP.

With the help of following graph, the increase and decrease in supply of TP can be seen. As supply of TP increases, the supply curve shifts to the right from S1 to S2. And as supply of TP fall, the supply curve shifts to the left from S1 to S3.