Question

Write a 1-2 page report that explains the law of demand and the determinants of demand using the following example and set of scenarios:

A study found that lower airfares led some people to substitute flying for driving to their vacation destinations. This reduced the demand for car travel and led to reduced traffic fatalities, since air travel is safer per passenger mile than car travel. Using the logic suggested by that study, suggest how each of the following events would affect the number of highway fatalities in any one year as well as how each of the following would affect the demand curve for driving to vacation destinations.

An increase in the price of gasoline

A large reduction in rental rates for passenger vans

An increase in airfares

Once you have considered the scenarios above, research another good or service that has a substitute. Imagine three different scenarios that could affect the demand curve for that good or service. Follow the same procedure as above, explaining how each scenario would affect the demand for the good or service.

Be sure to define demand and the determinants of demand in your response. Also address the question, how does a movement along the demand curve differ from a shift in the demand curve?

Answer 1

Answer 1;

An increase in the price of gasoline will lead to increase in the price of car travel as both gasoline and car are complements of each other. Thus, demand curve of car travel will shift leftwards and thus both the price and quantity demanded and supplied of cars will fall.

Since passenger vans and cars are substitutes of each other, thus reduction in the rental rates of the passenger vans will reduce the use of cars. Thus, demand curve of cars travel will shift leftwards and thus price of cars will fall and quantity demanded and supplied of cars will also fall.

Since airfares are substitute goods of car traveling, thus fall in the price of airfares will increase the quantity of car travel demanded and thus the demand for car travel will shift rightwards and thus price of car travel increases and quantity demanded and supplied of car travel also increases.