Demand for small automobiles

Question

What influence will each of the following contain on the demand for small automobiles such as the Mini Cooper & Smart car?

a.            Small automobiles become more fashionable.

b.            The price of large automobiles increase (along with the price of small autos remaining the similar).

c.            Income declines & small autos are an inferior good.

d.            Consumers anticipate the price of small autos will really come down in the near future.

e.            The price of gasoline drops substantially.

Answer 1

Demand enhance in (a), (b), and (c); decreases in (d). The last one (e) is ambiguous. As autos and gas are complements, one could argue that the reduction in gas prices would stimulate demand for all cars, comprising small ones. However, one could also argue that small cars are attractive to consumers due to fuel efficiency, and that a reduction in gas prices effectively decreases the price of the “gas guzzling” substitutes. That would encourage consumers to switch from smaller to larger cars (SUVs), and demand for small automobiles would drop. [It presents a good instance of the complexity of many of these changes.]