>> All right.
We're back for one more example
of dealing with shifts in supply
and demand, and non-price
determinants,
and the last one I would
like to, to come to is sort
of a two part problem,
and let's start
by examining the
foreign car market.
So, we're looking at
the foreign car market,
and what we're trying to do
is to determine what's going
to happen if Obama,
say, the President,
raises taxes on imported cars?
So, he's worried about the,
the, the U.S. market, you know,
U.S. car market becoming bad,
and so he's going to put taxes
on the foreign car
market, how does that play
out in our models of
supply and demand?
Well, taxes, taxes are one of
those non-price determinants
on supply, so when
you tax something,
what's the first
thing that happens?
Supply decreases, and
that's really what we want
to have happen, less foreign
cars in our market, right?
So, we force a tax on
foreign cars, and their supply
into the U.S. decreases.
How does that affect
the overall market?
Well, here is where the
price should have been
if there weren't any taxes,
notice that that's
the equilibrium price,
we know what's going to
happen, we're going to move
up to our new one, but
how does it happen?
Well, first, when the supply
decreases, what happens?
Well, the price of the cars,
they don't go up right away,
they hang out a little
while because right now,
the supply is less
than the demand.
Since the demand at
that price is greater,
we start to see a
shortage, and the shortage
of cars means the price goes up,
and since supply is
what moved, right?
Supply decreased,
we're going to move
up to our new price
along our demand curve
to our new equilibrium, and
remember, it's the quantity
of demanded decreases
until we get
to our new price equilibrium.
And notice what happen
to foreign cars,
exactly what you expect to have
happen when a price gets tacked
onto a good, the price
is going to go up,
so the price would
have been here
if we weren't taxing the
imports, and instead,
it moves up to here,
and that's a good thing
because what happens?
Well, that takes us
to example number two.
Let's look at the domestic
car market, and let's assume
that the price of
foreign cars goes up,
seems like a natural
thing to examine, right?
Here's our supply
and our demand.
Well, what's the relationship
between domestic cars
and foreign cars?
They are substitutes of each
other, if you're not going
to buy a foreign car, you're
going to buy a domestic one,
so what happens when the
price of a substitute goes up?
Price of a substitute, that's a
non-price determinant of demand,
therefore our demand for
domestic cars increases,
so demand goes up, or demand
increases is a better way
of putting it.
And the demand curve
shifts to the right,
so here's our new demand curve.
Now, again, same
old same old, right?
Here's our original equilibrium,
what happens at this new price,
at this new demand
for the old price?
Well, we see that our demand
is greater than our supply,
demand greater than
supply, shortage still.
If you have a shortage,
what has to happen?
Same thing, price rises,
except now, price is going
to rise along the supply
curve because it's the demand
that shifted, so we move
from our old equilibrium
to our new equilibrium
along the supply curve,
and our quantities
supplied increases
to our new equilibrium,
and so what we see is one
of the classic examples
of what happens
when you tax imported
goods, it is good.
Why is it good?
Because notice what
happened to the foreign car,
to the domestic car market,
how many domestic
cars are we selling?
Here was our old
domestic selling amount,
here is our new one, right?
We sell more American cars,
but what do you notice
about the price?
Higher, higher, so
it's good for the,
for the American car market,
the American car market
will sell more cars,
but at the same time, the
price is going to be higher,
not just for the domestic, not
-- or not just for the foreign,
but also for the
domestic, right?
For the foreign, the price is
higher 'cause the supply got
cut off.
For the domestic,
the price is higher
because the demand
gets inflated,
this is a classic example for
how to do deal with changes
in supply and demand, and
how they're ultimately going
to change the price.
