Question

Note: Please solve all parts given below and explanation as well

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) Cost of producing CD reduces, and hence at the same price any firm can now produce more goods, hence supply curve shifts downwards.

b) Cost of producing MP3 players, a substitute for CDs reduces, hence the price for MP3 reduces. This creates a reduced demand for CDs as substitutes are now cheaper. Hence demand curve shifts downwards.

c) Cost of producing CD players, a complementary good for CDs reduces, hence the price of the complementart good goes down, creating a rise in demand for CDs. Hence demand curve shifts upwards.

d) As the substitutes like Spotify, AccuRadio etc gain popularity, the demand for CDs reduces and demand curve shifts downwards.

e) As the substitutes are eliminated from the market, the demand for CDs resurges and the demand curve shifts upwards.