Question

16. Business Week recently declared, “We have entered the Age of the Internet” and observed that when markets for goods or services gain access to Internet, more consumers and more businesses participate in the market. Use supply and demand analysis to predict the effect of e-commerce on equilibrium output and equilibrium price of products gaining a presence on the Internet.

Answer 1

Increased participation of buyers in the market increases demand, shifting demand curve rightward, increasing both price and quantity. At the same time, increased participation of sellers in the market increases supply, shifting supply curve rightward, increasing quantity but decreasing price. The net effect is a definite increase in quantity, but price can rise, fall or remain unchanged if magnitude of rightward shift in demand curve is more, less or equal to the magnitude of rightward shift in supply curve.

In following graph, D0 & S0 are initial demand & supply curves intersecting at point A with initial price P0 and quantity Q0. As demand rises, D0 shifts right to D1 and as supply rises, S0 shifts right to S1, intersecting D1 at point B with higher quantity Q1 and new price P1. Since magnitude of rightward shift in demand curve is higher than magnitude of rightward shift in supply curve, P1 is higher than P0. This is by drawing only.