Question

Evaluate the set of events below. Determine how the events will impact their respective markets.

a. In examining the market for personal computers, a technological improvement reduces the cost of production.

     The effect of the event will be  (an increase / a decrease)   in  (demand / supply ) .

     As a result, the equilibrium price will  ( increase / decrease )  and the equilibrium quantity will  ( increase / decrease ) .

b. In examining the market for smart phones, there is a reduction in the number of sellers.

     The effect of the event will be  ( an increase / a decrease )  in  ( demand / supply )  .

     As a result, the equilibrium price will  ( increase / decrease) and the equilibrium quantity will  (increase / decrease ) .

c. In examining the market for apps for smart devices, there is a tax levied on the sellers of apps.

     The effect of the event will be  ( an increase / a decrease )  in  (demand / supply ) .

     As a result, the equilibrium price will  (increase / decrease) and the equilibrium quantity will  (increase / decrease ) .

Answer 1

a) an increase, supply, decrease, increase

Technological innovation reduces cost of production. Lower cost of production encourages production. This leads to increase in supply which results in decrease in equilibrium price and increase in equilibrium quantity.

b) a decrease, supply, increase, decrease

Decrease in number of sellers means less is produced and sold in the market. This leads to decrease in supply that results in increase in equilibrium price and decrease in equilibrium quantity.

c) a decrease, supply, increase, decrease

Imposition of tax increases cost of production which discourages production and results in decrease in supply. At new equilibrium, price is higher and quantity is lower.