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7
Demand and supply analysis 
The effects of 
demand and supply conditions 
on markets can be analysed by studying the behaviour of 
both demand and supply curves.
7.1 Case example 
In this section we look at a case example involving the analysis of demand and supply conditions. 
We will examine the likely effects on the price and quantity sold of secondhand cars in the event of:

(a) 
A large increase in petrol prices 

(b) 
A big increase in the price of new cars 
(c) 
A massive investment in public transport 
7.2 Analysis
Petrol and cars are 
complementary
products; hence, any change in the market for petrol (part (a) of this 
case example) would be expected to affect the market for second-hand cars. The demand for petrol, 
however, is likely to be relatively unresponsive to a change in price, so a change in price will only have a 
small impact on the quantity demanded. Consequently, a major change in its price will be necessary to 
affect the demand for any complementary product. Figure 10 assumes that there is a large increase in 
the price of fuel (petrol) as stated above. 
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CHAPTER 4
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MICROECONOMIC FACTORS 
 
111 
Figure 10 
In this instance, we have assumed that the rise in the price of fuel results from a change in the 
conditions of supply. This is the basis of the new supply curve S
1
shifting to the left of the existing one 
(Figure 10 (i)). A rise in the price of fuel is a rise in the cost of owning and running a car. There will thus 
be a fall in the demand for second-hand cars and a fall in the price and quantity sold (Figure 10 (ii)). 
Part (b) of this case example involves new vehicles and used vehicles as 
substitute 
products. 
 
 
 
 
 
 
 
 
 
Figure 11 
It is assumed that the increase in the price of new cars is the result of a major increase in supply costs. 
The rise in price causes a switch of demand into second-hand vehicles, so pushing up their price and 
leading to an increase in the number sold (Figure 11(ii)). 
The increased price of new vehicles could alternatively result from an increase in the demand for them. 
Case example, part (c) involves another 'product' which is in competition with second-hand cars. If there 
is a reduction in the price of public transport services following the outward shift in supply, this could be 
the result (Figure 12). 
(i) New vehicles market
(ii) Used vehicles market
Number
of vehicles
Price
0
S
q
q
1
p
p
1
D
S
1
Number
of vehicles
Price
0
q
q
1
p
1
p
D
1
D
S
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