Supply and Demand: In early 2020 the COVID-19 pandemic swept across the nation and world. In...

Supply and Demand: In early 2020 the COVID-19 pandemic swept across the nation and world. In response, many workers moved from in-person working to remote working.
Webcams in particular showed an increase in the amount sold, especially the most well-known and trusted brands.

a. Most webcams are produced in China. The US is currently in a trade war with the Chinese which effectively causes additional costs on the production of Chinese goods through tariffs (i.e., taxes). Suppose after the next election, the US abandons the trade war and removes the tariffs. What effect should that have on the price of webcams?

b. Logitech claims that it is ramping up capacity but is working to “overcome component shortages.” Using an elasticity of supply argument,explain what Logitech is claiming here. Do you expect that to last indefinitely?

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Expert Solution

When the tariffs are removed, the prices of webcam should come down, since there are no additional costs being imposed because of being produced in China. THowever, it would ultimately depend on the elasticity of the demand for webcams. If the price elasticity of demand for webcams is low and the producers of the webcams are aware of this fact, there might not be much of a change in thee price.

Elasticity of supply measures the responsiveness to the supply of a good or service after a change in its market price. Elasticity of Supply is relatively inelastic in the short run, i.e it is very difficult for a firm to increase the supply for a good beyond its capacity in a short period of time. This happens because it is extremely difficult for firms to suddenly increase the input factors of production (labour and capital) in the short run. However, in the long run, firms' elasticity of supply is relatively higher, as they can hire labour and pump in capital. Therefore, sudden increase in demand might have caused the component shortage for Logitech webcams. However, in the long run, Logitech would be able to increase its supply and thus the shortages would cease to exist.

Rahul Sunny answered 1 year ago

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