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For example, the electricity bills of the factories or the taxes paid on land are fixed costs because even if no production takes place in the factories, these costs would still be incurred.
Variable costs, on the other hand, are those costs that are directly related to the number of units produced (Case & Fair, 2007). For example, depending on the number of cars produced, the variable costs would differ because for every additional car produced, the company would incur costs in components such as doors, engines, glasses, mirrors, seats, etc.
As the demand of new cars increases, the demand curve shifts to the right (D1). This means that for the same price (P0), a higher quantity of cars (Q1) would be demanded. As a result, firms can observe higher profits by increasing the price, which in return causes the demand to decrease until the intersection of D1 and S0 is reached. At this point (E*), the market is in equilibrium.
As demand for new cars increased and demand for used cars decreased, firms would decrease prices of the used cars to increase sales. Therefore, overall, the price and output of used cars would decrease.
An obvious opportunity cost for funding the Scrappage Scheme is that the government could have used that money on other areas of the transport industry. For instance, if the government observed a decline in the number of cars purchased, due to recession and increasing fuel prices, it could have made investments to boost the public transport sector and could have promoted the usage of public transport and created more job opportunities there.
There are many reasons why PED for cars is likely to be more elastic in large cities. Firstly, the larger cities, such as London, are economic hubs of UK and they have a good infrastructure present. These places offer a large of substitutes for cars to the consumers. There are many forms of public transports available, for example. The consumers can
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