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In: Economics

Over the last 10 years the price of a cell phone has declined dramatically. At the...

  1. Over the last 10 years the price of a cell phone has declined dramatically. At the same time, taste and preferences for cell phones has increased substantially. Using a supply and demand diagram of the market for cell phones, explain what likely caused this outcome.

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Expert Solution


The market adjustment can be described as follows:

1) First there is a rise in demand - this is when consumers realize the benefits of the new technology.
A cell phone is more useful the more people have it - they show network effects - and soon more and more people are buying cell phones until the existing producers just can't keep up. This is shown as the shift from D0 to D1 keeping supply curve fixed at S0; price of a cell phone rises.

2) More producers get to hear that there are sweet profits to be made in the cell phone industry; this motivates them to try and imitate existing technology. As more and more producers join the market, the supply curve shifts outward from S0 to S1; price falls.

Rahul Sunny answered 2 years ago
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