Question

If the demand for computer software increases, while software-making technology improves, what happens to the market equilibrium in the software market?

Answer 1

Given, an increase in demand for computer software will lead to a rightward shift in the demand curve. And an improvement in software-making technology will lead to more software being produced at the same price. Thus, the supply curve will shift rightwards.

The new equilibrium will be attained at a point where the equilibrium quantity of computer software is higher. Whether the equilibrium price is higher, lower or remain the same depends upon the magnitude of shift of both the curves.

Diagrammatically,

Case I:

When demand and supply curves shift by the same magnitude, the equilibrium price remains the same and the equilibrium quantity increases.

Case II;

When the magnitude of the shift in supply is more than the magnitude of the shift in the demand curve, the equilibrium price decreases and the equilibrium quantity increases.

Case III:

When the magnitude of the shift in the demand curve is more than the magnitude of the shift in the supply curve, the equilibrium price increases and the equilibrium quantity also increases.