Speedy Limo is a limousine service located on the north side of Cleveland. It sp

Question

Speedy Limo is a limousine service located on the north side of Cleveland. It specializes in transporting people to and from Hopkins International airport, although it will deliver people anywhere in the Cleveland area. It competes with taxis and public transportation as well as people deciding to drive their own cars. The demand for the firm%u2019s services has been increasing as more consumers use the service for convenience and due to higher parking rates at the airport. However, increases in gasoline prices and wage rates for drivers have increased costs for the firm. Describe the supply and demand shifts that are occurring for this firm (graphs might help in your description). What would happen to the demand curve if the major taxi companies lowered their prices? If you were asked to forecast future demand for this firm, how would you set up a forecasting model?

Explanation / Answer

The demand curve for computers has definitely shifted to the right for several reasons. Real incomes have risen, there has been a rise in their preferences and the marketing of computers has increased, to name just three factors. But there has also been a huge shift to the right in the supply curve for computers. There have been immense leaps in technology so that any given computer can be produced at a fraction of the cost compared with a decade ago. This can be seen in the diagram above. The equilibrium price has fallen from P1 to P2, a fairly large relative drop, and the quantity supplied and demanded has also risen hugely, from Q1 to Q2. What actually happens in the market for computers at the moment is that the price remains fairly constant, but for the same price, a given computer gets technically better and better as the months go by.

Earlier, we called this process the 'price mechanism'. From the analysis above, we can see that the price itself has the most important role. The rising price has acted as a signal to possible new firms who might want to join this expanding industry. It acted as an incentive, encouraging existing firms to produce more (the movement along the supply curve). It also acted as a sort of rationing device in the sense that it put off some existing buyers and helped make sure that demand matched supply.

You can probably see that there are three other diagrams that I could draw: a shift to the left of the demand curve; a shift to the right of the supply curve and a shift to the left of the supply curve, all assuming ceteris paribus. You should be able to think of reasons why any one of those curves might shift (ceteris paribus) and then draw the appropriate diagram yourself.

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