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Prices of desktop computers came down at the same time the quantity of desktop computers produced...

Prices of desktop computers came down at the same time the quantity of desktop computers produced fell. Therefore, one way for us to bring down prices of basic commodities is to reduce their production” Is the statement true or false? Explain your answer using the terminology of the demand and supply model.

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Answer #1

False.

(Price of desktop computers will increase if the production decreased. Let's explain this with the help of a diagram.

Let DD be the demand for computers and SS be the supply of computers. Equilibrium in the market is determined by the intersection of DD and SS. Equilibrium price is P and equilibrium quantity is Q. As the production of desktop computers falls, supply curve shifts to left from SS to S1S1. New equilibrium is determined by the intersection of S1S1 and DD. At the new equilibrium price increases from P to P1 and quantity falls from Q to Q1.

So reducing the production won't bring down the prices. It will only increase the price of commodities. In order to decrease prices, policy have to be altered. Instead of decreasing production, production should be increased.

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