During the 1990s, technological advance reduced the cost of computer chips. Explain, with the use supply and demand diagrams, how the following markets are affected in terms of prices and quantities.
a) DEMAND- Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship as showed on the graph below. Due to technological advance reducing the cost of computer chips, there is a downward shift on the demand curve. As there is price factor involved, there is a movement in the curve. As the price decreased, the total quantity demand increased. Moreover due to reduce cost in computer chips, the selling price has also been reduced therefore rise in consumers purchasing more computer chips.
As the price is less than the equilibrium price there is an excess quantity demanded, which may course a shortage. SUPPLY- The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. In this case, movement to the right of the supply curve as the supply has also increased due to the decrease in cost of computer chips. As the selling price has decreased, the supply has increased because more people are willing and can afford to purchase the computer chip.
b) Demand- A computer software falls under a complementary good as it’s jointly consumed with computer chips. As a result, there is an inverse relationship between price changes for computer chips therefore the demand for its complementary good which in this case is computer software will decrease. If the price of computer software increased there would be upward shift on the demand curve therefore lesser quantity demanded as there are fewer people purchasing the product. Supply- as there was an increase in the price, there was a decrease in the supply.
c) Type writers in this case would make no changes to the price or the quantity of its products as price reduction on computer-chip has no direct relation to it. The ceteris paribus holds all prices of other goods constant. Therefore, movement along a demand curve only occurs solely in response to changes in the price of computer-chips; that is, its own price.
After an economics lecture one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic.
a)In what sense is taxing food is a “good” way to raise revenue? b)In what sense is it not a “good way” to raise revenue?
a) Food is a need, it is essential to us. Taxing food is a good way to raise revenue because the percentage change in quantity demanded is smaller than the percentage change in price (1 per cent in quantity demanded in response to a 1 per cent change in price). The demand for food is inelastic because the elasticity coefficient is less than 1 and total revenue varies directly with the direction of the price change (as the price of food increases, total revenue also rises). People will have to buy food to survive as most people live a busy life to grow their own crop.
b) It is not a good way to raise revenue as people that live an average life or lower would suffer more. As it is they can barely put the food on the dinner table for the family, raising revenue would cause them to struggle even more causing more crimes such as shop lifting. Healthy foods are much dearer than junk foods therefore people will start eating take-away foods which would increase the rate of obesity. With take-way chains like Mc Donald’s promoting cheaper items such as the “loose change menu” and also advertising new food products regularly, take-way food would be the easier option.
Most studies of firms’ long run costs have found that average costs decline as firms produce increasingly larger output levels (economies of scale), such as for automobile firms. However, trucking (haulage) firms appear not to experience falling average costs associated with large-scale operations. Why might this be the case? Explain.
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