Question

In 2014, Knight Electronics sold 350,000 digital video recorders (DVRs). Based on the company’s analysis of the DVR market, the company believed that $160 was the equilibrium price based on the following supply and demand schedules.

            2014 Price      Amount Supplied    Amount Demanded

$120                       290,000                     390,000

140                         320,000                     370,000

160                         350,000                     350,000

180                         380,000                     330,000

200                         410,000                     310,000

220                         440,000                     290,000

As the price of gasoline rose and the economy hit the skids, consumers began driving less and going out less frequently for entertainment. With more people staying at home, DVR usages increased. In 2015 Knight revised its estimate of the amount of product demanded. At each of the above price points, it estimates that consumers will purchase (demand) 50,000 more DVRs. For instance, at $140, now 420,000 DVRs will be sold. The price–amount supplied relationship remains the same.

1. Describe what has happened to the supply and demand curves for Knight DVRs in 2014.

2. What is the new equilibrium price?

3. How many DVRs will be produced at the new equilibrium price?

4.          Knight revised its estimate of the amount of product demanded for 2015 as described above. In 2016 a new technology became available enabling DVRs to communicate over cell phones and the Internet. Knight’s competitors are selling this new DVR, called SuperDVR, for $150. What will happen to the supply and demand curves for Knight DVRs now?

Answer 1

a) In 2014, demand and supply curves meet at a different point, demand = supply=380,000. That is, 380,000 DVRDs will be produced. Price will be $180, as seen in the table below:

2014 Price      Amount Supplied    Amount Demanded New Demand 2015

$120                       290,000                     390,000 440,000

140                         320,000                     370,000 420,000

160                         350,000                     350,000 400,000

180                         380,000                     330,000   380,000

200                         410,000                     310,000 360,000

220                         440,000                     290,000 340,000

b) Super DVR is substitute of DVR. Consumers will prefer to buy Super DVR now. So, the demand curve will shift to the left, indicating a decrease in quantity demanded. It will meet the supply curve at a new equilibrium point resulting in decreased quantity and decreased price.