What\'s wrong with this way of thinking? \"Economists argue that lower prices wi

Question

What's wrong with this way of thinking? "Economists argue that lower prices will result in fewer units being supplied. However, there are exceptions to this rule. For example, in 1972 a very simple ten-digit electronic calculator sold for $120.00. By 2000, the price of the same type of calculators had declined to less than $5.00. Yet business firms produced and sold many more calculators in 2000 than they did in 1972. Lower prices did not result in less production or in a decline in the number of calculators supplied.

Explanation / Answer

The notion that lower prices will result in less production is derived from the supply curve. But the market supply curve is the sum of each of the firms' supply curves. And each firm's supply curve is the portion of the marginal cost curve that lies above average variable cost. So, the problem with the argument made above is that the marginal cost of a calculator in 1972 is much different than it is in 2000. Thus, there has been an increase in supply, which results in lower prices and greater quantities. If the government would have set the price of a calculator to $5 in 1972, much fewer calculators would have sold because the marginal cost of producing a calculator was much larger in 1972. In fact, no calculators would have been produced if the marginal cost of producing a calculator was above $5. And it probably was.

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