Draw supply and demand curves. Assume that these are the supply and demand curves for the...

Draw supply and demand curves. Assume that these are the supply and demand curves for the Microsoft Surface tablet. Draw what happens on this graph when the price of iPads decreases. Surface tablets and iPads are substitute goods. Clearly illustrate and label all equilibrium points, prices, and quantities.

Solutions

Expert Solution

There exists a direct relationship between price of a substitute good and demand of a given good.

If price of substitute good increases then demand for given good also increases.

On the other hand, if price of substitute good decreases then demand for given good also decreases.

Following figure shows the Market For Microsoft Surface Tablets -

Initially, the market for Microsoft Surface Tablet was in equilibrium at point E1, where demand curve, D1, and supply curve, S1 were intersecting each other. The equilibrium price was P1 per tablet and equilibrium quantity was Q1 tablets.

Now, the price of iPads has decreased. iPads and Microsoft surface tablets are substitute goods. So, this decrease in price of iPads will result in a decrease in demand for Microsoft surface tablets.

This decrease in demand will shift the demand curve to the left from D1 to D2.

New equilibrium is attained at point E2, where new demand curve, D2, is intersecting the supply curve, S1.

New equilibrium price is P2 and new equilibrium quantity is Q2.

Thus, decrease in price of substitute (iPads) has resulted in a decrease in equilibrium price and equilibrium quantity of Microsoft Surface Tablets.

Rahul Sunny answered 1 year ago

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