5.5 During the period 2007 through 2012, passenger car production in the EU fell from a rate of 17 million units per year to a rate of less than 15 million, a decrease of greater than 10 percent. At the same time, the number of new passenger car registrations slowed down too. The replacement cycle lengthened, and the average number of cars per household fell. If there are fewer new cars purchased, it is a decline in demand. If fewer new units are produced, it is a decline in supply.

a. Draw a standard supply and demand diagram, which shows the demand for new passenger cars that are purchased each month, and the supply of new units produced and put on the market each month. Assume that the quantity supplied and demanded are equal at 1,000,000 units and at a price of €50,000.

b. On the same diagram show a decline in demand. What would happen if this market behaved like most markets?

c. Now suppose that prices did not change immediately.

Sellers decided not to adjust price even though demand is below supply. What would happen to the number of passenger cars for sale (the inventory of unsold new passenger cars) if prices stayed the same following the drop in demand?

d. Now suppose that the supply of new passenger cars put on the market dropped, but price still stayed the same at $200,000. Can you tell a story that brings the market back to equilibrium without a drop in price?

e. Go to http://www.acea.be/statistics. Look at the current press release, which contains data for the most recent month and the past years. What trends can you observe?