Question

What's wrong with this way of thinking? "Economists argue that lower prices will result in fewer units being supplied. However, there are exceptions to this rule. For example, in 1972 a very simple ten-digit electronic calculator sold for $120.00. By 2000, the price of the same type of calculators had declined to less than $5.00. Yet business firms produced and sold many more calculators in 2000 than they did in 1972. Lower prices did not result in less production or in a decline in the number of calculators supplied.

a) can a consumer have a demand curve with a positive slope if its only objectives is to maximize his her utility? Why or why not? Could you please explain.

b) can producer (firm) have a supply curve with a negative slope if its objective is to maximize its profit? Why or why not? Could you please explain.

Answer 1

The general behavior of the supply curve that lower prices will result in fewer units being supplied remains valid only when the assumption of ceteris paribus (all other things remaining constant) holds true. But in the given instance this assumption is violated. Factors such as market conditions, technological advancements and per capita incomes did not remain constant from 1972 to 2000.

The increase in consumer's demand curve can be explained by quality differentials in the calculators. Due to obvious reasons, the calculators in 1972 performed only basic functions but till 2000, various technological upgrades must have been made. Advancement in features of calculators could have been the reason of high demand. Further, increase in supply price must also have been matched by increased consumer incomes after inflation indexation.

The increase in supply could be explained by differentials in marginal cost or MC. A firm's supply curve is defined as the portion of marginal cost that lies above average variable cost. It is expected that the marginal cost of producing a calculator in 1972 was much higher than it is in 2000 due to technological advancements and automation in the production process. This is also because newer varieties of calculators would be priced higher and the older models would become cheaper relatively. Thus, the increase in supply consequently resulted in lower prices but greater quantities.

If a price ceiling of $5 was introduced in 1972, the calculators sold would have reduced drastically since the marginal cost of producing a calculator was higher in 1972.