Question

1.Suppose there is a technological advance that reduces the cost of producing computer chips. Use supply and demand curves to analyse the effects in the following markets:

a. market for computers.

b. market for computer software.

c. market for typewriters

2.Explain with the aid of an example, the law of demand and the law of supply.

Answer 1

a) Market for computers: Supply would shift to the right (more would be supplied at a given price level), as a result, price level would decrease and equilibrium quantity would increase.

b) Market for computer software: Demand would shift to the right (more would be demanded at a given price level as this is a complementary good), as a result, price level would increase and equilibrium quantity would increase.

c) Market for typewriters: Demand would shift to the left (less would be demanded at a given price level as this is a substitute good), as a result, price level would decrease and equilibrium quantity would decrease.

2) Law of demand states that more quantity would be demanded as the price falls and less would be demanded when the price rises. In the example above, more computers would be demanded by the people when they are cheaper and less would be demanded when they become expensive.

Similarly, law of supply states that lesser quantity would be supplied as the price falls and more would be supplied when the price rises. In the example above, more computers would be supplied by the sellers when they are priced higher (sellers are able to meet their production costs) and less would be supplied when their price falls.