Question

2. Discuss the impact on the equilibrium price and quantity and illustrate it with a graph. a) Suppose a new discovery in computer manufacturing has just made computer production cheaper. Also, the popularity and usefulness of computers continues to grow. Use Supply and Demand analysis to predict how these shocks will affect equilibrium price and quantity of computers. Illustrate your answer with a graph. The currency used by the Confederate States of America during its brief existence from 1861 to 1865 has become a collector's item today. The Confederate Currency supply is perfectly inelastic. As the demand for the collectible increases and some of the old currency is destroyed or no longer of value as a collectible, what happens b) to the market price and quantity? Illustrate your answer with a graph

Answer 1

a) As the computers are becoming cheaper and cheaper to produce and the demand for them are growing it will have an indeterminate affect on the price but the quantity of the computer will increase. Increase in the supply will decrease the price and increase in the demand will increase the price. the net change in the price will depend on the absolute change in the supply and demand. Increase in the supply will shift the demand curve to the right and increase in the demand will shift the demand curve to the right. in both the cases the quantity will increase.

b) As the supply is inelastic its curve will be a vertical line and the demand will be downward sloping. If the demand increased the demand curve will shift upward, increasing the price. Here, the demand curve shifted form D to D1 and the price increased from P to P* leaving the supply unchanged.