Question

Doodads are a consumer electronic device.

a. Assume there is an improvement in the technology used to produce doodads in 2015. What will change in the supply of doodads? What will change in the demand for doodads? What could be expected to happen to the equilibrium price and quantity in the market for doodads? Draw a graph (or graphs) and use it (them) to illustrate your answers.

b. Now assume that at the same time as the technical improvement, there is a recession and consumer income falls. What will happen to the supply and demand for doodads? How does the equilibrium price and quantity compare to those prior to 2015. Once again, graph your answers.

Answer 1

a) When there is an improvement in the technology used to produce a good, its productivity rises and more can be produced with same cost. Hence there is an increase in the supply of doodads. This is shown by a rightward shift of the supply curve. The demand for doodads should remain unchanged as there are no factors working for demand. The equilibrium price should fall and equilibrium quantity should rise in the market for doodads.

b) In conjugation with part a), there is a recession and consumer income falls. This decreases the demand for the good and so the demand curve shifts to the left. Since technical improvement causes the supply to increase and income reduction causes the demand to increase, both these factors reduce the equilibrium price. But the effect on quantity is ambiguous and depends which curve shifts more. Assuming that the size of shifts are same, there final result will have a lower price and unchanged quantity