Question

PROBLEM:

With the aid of supply and demand diagrams (you need an explicit diagram for each case), show and explain how and why we would expect prices and quantities to change in the market for Compact Discs (CDs) in each of the following situations when:

(a) Technical improvements lead to a fall in the cost of producing CDs.
(b) Technical improvements lead to a fall in the cost of producing MP3 players.
(c) Technical improvements lead to a fall in the cost of producing CD-players.
(d) Streaming music services, such as Spotify, AccuRadio, and Grooveshark, etc. become widely available
(e) Congress passes laws making streaming music services, such as Spotify, AccuRadio, and Grooveshark, etc. illegal.

Answer 1

A)  Technical improvements lead to a fall in the cost of producing CDs

When cost of production falls , producer earn profit as can charge high price for the product.Due to it supply increases and shift upwards.equilibrium price will decrease and equilibrium output will increase.

B) Technical improvements lead to a fall in the cost of producing MP3 players.

CD and MP 3 are substitutes. With fall in cost of price of MP3 player will increase. Then supply of CD will decrease and supply curve will shift backwards.equilibrium price will increase and equilibrium output will decrease.

C) Technical improvements lead to a fall in the cost of producing CD-players.

When cost of production falls , producer earn profit as can charge high price for the product.Due to it supply increases and shift upwards. Equilibrium price will decrease and equilibrium output will increase.

D)  Streaming music services, such as Spotify, AccuRadio, and Grooveshark, etc. become widely available

Due to it demand will increase and demand curve will shift upwards. Thereason is that with increase in features people will demand the product.equilibrium price will increase and equilibrium output will increase.