Several years ago Japan was pressured to accept a “Voluntary Export Restraint” (VER) on the number of cars that it shipped to the United States. Use separate demand and supply diagrams for
the market for Japanese cars in the United States, and
the market for US cars in the United States,
and show and explain the effect of the introduction of the VER on each market. What does the supply curve for Japanese cars look like after the VER is introduced?
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Since I cannot actually make diagrams for you, I will describe how to make the diagrams for each market mentioned in this question. I assume that you are familiar with basic supply and demand curves. You can also follow the link below to see a sample graph with supply and demand curves shown.
If Japan accepts a deal to limit the number of cars that it exports to the United States, the demand for Japanese cars will not be affected. However, the price of these cars will still go up. The reason for this is the fact that the supply of Japanese cars in the US will change. When Japan accepts the VER, the number of cars that it can export drops at every price level. That means that fewer Japanese cars will be supplied at any given price. On the graph, you show this decrease in supply by drawing a new supply curve to the left of the original curve. When the supply curve moves to the left, the equilibrium quantity decreases while the equilibrium price rises.
When Japan accepts the VER, the demand for American cars in the US will rise. Japanese cars and American cars are what economists call substitute goods. When the price of one substitute good rises, people will want to buy more of the other substitute good. In this case, the price of Japanese cars in the US rises because of the VER. With Japanese cars becoming more expensive, Americans are more likely to choose to buy American cars. This means that the demand for American cars rises. On the graph, you show this by drawing a new demand curve to the right of the original curve. The new demand curve will show a new equilibrium quantity and price. Both quantity and price will be higher than they were before. Thus, the presence of the VER will increase the quantity of American cars sold in the US and will also increase the price at which they are sold.
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