Question

1. One of the largest changes in the economy over the past several decades is that technological advances have reduced the cost of making computers.
2. 1. Draw a supply-and-demand diagram to show what happen to price and quantity in the market for computers.
   2. Forty years ago, students used typewriters to prepare papers for their classes; today they used computers. Does that make computers and typewriters complements or substitutes? Use a supply-and-demand diagram to show what happen to price and quantity in the market for typewriters. Should typewriter producers have been happy or sad about the technological advance in computers? Give a reason for your answer.
   3. Are computers and software complements or substitutes? Draw a supply-and-demand diagram to show what happen to price and quantity in the market for software. Should software producers have been happy or sad with about the technological advance in computers? Why/why not?
   4. Does this analysis help explain why software producer Bill Gates is one of the world’s richest people?

Answer 1

Part A)

As technology across the globe has changed rapidly, the overall productivity of nations as well as organization has changed rapidly. All of this can be attributed to the development of technology and its increased availability.

As a resource expands its supply, the price for it goes significantly lower. As this happens the product becomes more affordable and people adopt the same rapidly.

In the present context, this may be explained as an increase in supply of computers which has led to a reduction in price, high availability and has ultimately resulted in the rise of the overall industry.

This can be explained with the help of the following diagram: -

In the above graph, we see that the supply curve shifts towards the left indicating an increase in technology and production of computers. As a result of this, the price for these falls to a reduced price, and there is more demand in the market as quantity shifts from quantity 1 to quantity 2. The resultant is that equilibrium also changes in the economy from equilibrium 1 to equilibrium 2 respectively.

Part B)

Type writers and computers are said to be substitutes for one another. This is because as the demand for computers as a technology began to gain numbers, that for type writers began to reduce. Computers allowed people to do a lot more than just write over a period of time. Therefore, as the consumers for computers began increasing as explained above, those for type writers saw a gradual decline. The graph for computers has already been explained above, and that for typewriters and their effect on demand is as follows it is important also to know, that it is bad for typewriter manufacturers that computers came into existence as their demand saw a steep decline: -

In the above diagram we see that the demand shifts from Demand 1 to Demand 2 which is a clear indication of a decline. As a result of this, the price falls from Price 1 to Price 2 and the quantity supplied shifts from Quantity 1 to Quantity 2 and the equilibrium has also shifted from Old to New as indicated above.

Part C & D)

Software are Computers are complimentary goods to one another. As the demand for computers goes up, the subsequent demand for software that powers these very computers also goes up. The is the reverse of what has been indicated in the section above. It can be explained in the form of a graph as follows. It is important to note, that it is good for any software manufacturer, that the demand for computers goes up.

As far as bill gates, is concerned his primary income is from software production. As technology and innovation have gone up, so has the demand for technological products which has led to wide scale spread of computers and therefore, income for him has accrued and increased over a period of time.

The graph explaining the increase in demand for software is as follows: -

We see in the above graph, that the initial equilibrium changes to the new equilibrium as a result of the increase in quantity demanded, supplied and price for the goods.

This is a win win situation for software developers as the demand for both increase rapidly and profit margins become higher.

Please feel free to ask your doubts in the comments section.