Question

In the market for tablet computers, more suppliers enter the market and the price of laptops, a substitute good, increases, while all other factors remain constant. Explain the change(s) in the equilibrium price and quantity.

Answer 1

When more suppliers enter the market for tablet computers, the supply curve for this good shifts right. See the graph below. The original supply curve is given by ss₁. The new supply curve is ss₂.

When the price of a substitute good increases, the demand curve for the original good shifts right. As laptops get more expensive, more consumers choose to buy tablets. The demand curve also shifts right from dd₁ to dd₂.

The equilibrium quantity unambiguously increases.

The equilibrium price may decrease/increase/remain the same- all depending on how much we decide to shift the demand and supply curve. In the graph above, because I shifted the supply curve more than the demand curve, the price fell. I could also, instead of shifting the demand curve to dd₂, have shifted the demand curve to dd₃ (see the graph below). In that case, the price actually increased. So the effect on price is ambiguous. It could be anything.