If income decreases and, at the same time, a new technology is discovered that lowers the...

If income decreases and, at the same time, a new technology is discovered that lowers the cost of producing the good, which of the following will happen?

Expert Solution

Answer.) Suppose market was in equilibrium initially. If income decreases then it will surely decrease demand and demand curve will shift to left. Now, if a new technology is discovered that lowers the cost of producing the good, It will surely increase supply and thus supply curve will shift to right. Note tha movement of both demand and supply curve indicating that equilibrium price must go down. Its so because due to ( decrease in demand + increase in supply) , there is surplus of goods available in the market and that force market players to decrease equilibrium price level.

But we can't say anything such about equilibrium quantity. Its so because both supply and demand are moving in opposite directions. Therefore, if decrease in demand is lesser than increase in supply then it will increase equilibrium quantity but if decrease in demand is superior than increase in supply then it will decrease equilibrium quantity. Hence, effect on equilibrium quantity will be ambiguous.

Rahul Sunny answered 2 years ago

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