The new equilibrium was not set on the intersection of S1 and D curve at the point E1. Here the new price was P1. From the diagram, we can see that the government policy has decreased the prices from P to P1 and increased the sales from Q to Q1.
c) The result of this policy would have been that more cars were scrapped rather than entering the market for second-hand used cars. This would have considerably reduced the supply in the second-hand car market. As a result of this, the supply curve would have moved to left, increasing the prices in the second hand market and reducing quantity of cars being sold in the second hand market.
3) Opportunity cost is the next best alternative forgone by choosing the best option. The opportunity costs for government of the UK’s government for financing this scheme could have been improving the road infrastructure in the metros of the United Kingdom. This means that by choosing to finance this scheme, the government is not being able to pursue its other aims.
a) The price elasticity of demand is responsiveness of demand to the changes in price of cars. Since, in London people have a higher income, it is considered as status symbol and because it has become somewhat a necessity, as a result people have higher price elasticity of demand in London than in South west, where people have a comparatively lower income and less class consciousness.
i) This can be done by informing people about the environmental benefits of the car and by telling them that these cars would eventually save them a lot of money, once the oil prices go out of control.
ii) This will help the firm to raise prices without losing too much of their customers. Consumers often shift away from the product if the price of a product increases, in case of high price elasticity of demand. So, the firms can benefit by low price