Question

Pharmaceutical drugs have an inelastic demand and computers have an elastic demand. suppose that technological advance doubles the supply of both product. what happens to the equilibrium price and quantity in each market?

Answer 1

Pharmaceutical drugs: With the advancement in technology, the supply increases which reduces the cost of production and hence reduces the price. But the demand being inelastic (Quantity demanded doesn’t change with changes in price), with the decrease in price the quantity demanded does not change. So equilibrium price decreases and equilibrium quantity does not change.

Computers: With the advancement in technology, the supply increases which reduces the cost of production and hence reduces the price. As the demand being elastic (Quantity demanded change with changes in price), with the decrease in price the quantity demanded changes. So equilibrium price decreases and equilibrium quantity increases.