With the aid of supply and demand diagrams, explain how and why each of the foll
ID: 1222653 • Letter: W
Question
With the aid of supply and demand diagrams, explain how and why each of the following is likely to affect the price and quantity in the market for Compact Discs (CDs).
(a) A technical break-through reduces the cost of producing CDs.
(b) A technical break-through reduces the cost of producing CD-players.
(c) A technical break-through reduces the cost of MP3-players.
(d) Technical innovations increase the availability of free music streaming through services such as Pandora, Jango, iHeartRadio, and Amazon’s Prime Music.
Explanation / Answer
The problem is related with market of compact disc (CD). Customers will demand CD and maufacturer will supply it. Demand is inversly related with price. While supply has a direct relatio. Equilibrium price ad quantities are found where demand and supply are equal. Consider the impact of different situations on such equilibrium price and quantity.
(a) A technical breakthrough has reduced the cost of producing CDs. It will reduce sell price of CD considerably. Deemand curves are drawn on the assumption that techology will not change. If it chages, then curve will shift to the right. So more CDs will be demaded at a given price after technology change.
Supply curve will also shift to the right. ow CDs are more profitable. So producers are ready to supply more CDs at a given price.
Thus equilibrium point will also move to the right. Now more quatities will be produced and sold at lower price.
In the above diagram, blue lines are original curves and orange lines are shifted curve. Initial equilibrium was at point e1. Here equilibrium price and quantities are P1 and Q1 respectively. After change, equilibrium point has shifted to e2. Now higher quatities Q2 is sold at lower price P2.
Result: Equilibrium price will fall and equilibrium quantity will rise.
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(b) CD players and CDs are complemetary products. Both of them are used together. So increase in the demand of CD player, will increase the demand of CD also. So demand curve of CD will shift to the right. Now more CDS will be sold at higher price.
In the diagram Q2 units are sold at higher price P2.
Result: Price of CD will rise. Quantity will also icrease.
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Answer (c): Here due to techical breakthrough, cost of MP3 players have bee reduced, MP3 players and CD players are substitutes. Requirement of oe ca be satisfied by using other. So reduction in MP-3 price will induce consumers to substitute it for CD player. So less CD players will be sold. As Cds are complemetaries of CD player, its demand will also decrease. So demand curve of CD will shift to the left.
In diagram, less quantity Q2 is sold at lower price P1.
Result: Less CDs are sold at lower price.
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(d) If free music service are available easily, then less CDs will be purchased. So both demand and supply curve will move to the left. Now less quatities will be bought at higher price.
In the diagram, now less quantity Q2 is sold at higher price P2.
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