Question

If a new breakthrough in manufacturing technology reduces the cost of producing Blu-ray players by half, what will happen to each of the following:

• Supply of Blu-ray players
• Demand for Blu-ray players; and demand for Blu-rays
• Equilibrium price and quantity of Blu-ray players

Explain the statement "people respond to incentives and disincentives" in relation to the demand and supply curve for good X. Hint laws of demand and supply.

Answer 1

Ans. Suppose the equilibrium in the market for blu-ray players is where price is P and quantity is Q. A decrease in cost of production of blu-ray players will increase the supply of blu-ray players at each price level level shifting the supply curve leftwards from S to S'. This leads to decrease in price of blu-ray player at equilibrium quantity from P to P'. This decrease in price increases the quantity demanded for blue-ray players increases moving the equilibrium from quantity Q to Q" and price from P' to P". Also, this decrease in price of blu-ray player from P to P" leads to an increase in demand from blu-ray disks as they are used along with the blu-ray players making the two goods complementary goods. So, price of blu-ray disks ultimately increases.

Ans. People respond to incentives and disincentives this can be seen in the shape of deman curve which is downward sloping (given by law of demand), as the price of the good decreases, the quantity demanded of that good increases as a decrease in price incentivises the consumers to buy more of the good. Similarly, people respond to disincentives, this can be seen in the shape of the supply curve which is upward sloping (given by law of supply), this means that when price of a good decreases, the quantity supplied also decreases. This is because decrease in price reduces the profit of the supplier disincentivising him to supply more, thus, quantity supplied of the good falls.

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