[Related to the Don\'t Let This Happen to You] A student was asked to draw a dem

Question

[Related to the Don't Let This Happen to You] A student was asked to draw a demand and supply graph to illustrate the effect on the market for smartwatches of a fall in the price of displays used in smartwatches, holding everything else constant. She drew the graph to the right and explained it as follows: "Displays are an input to smartwatches, so a fall in the price of displays will cause the supply curve for smartwatches to shift to the right (from S, to S2). Because this shift in the supply curve results in a lower price (P2). consumers will want to buy more smartwatches and the demand curve will shift to the right (from D1 to D2). We know that more smartwatches will be sold, but we can't be sure whether the price of smartwatches will rise or fall. That depends on whether the supply curve or the demand curve has shifted farther to the right. I assume that the effect on supply is greater than the effect on demand, so I show the final equilibrium price (P3) as being lower than the initial equilibrium price (Pi). Where is the flaw in the student's argument? O O O Supply will shift inward. Demand will not shift. Demand will shift inward.

Explanation / Answer

The correct option is B, because shift in demand can come only through factors affecting demand. From theory we know that demand Q =f( Income, Price of related goods, tastes , etc.).But price of display does not affect demand therefore, it will not shift.

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