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Chapter 3: Problem 7

Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually happens in each situation. a. "A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end." b. "A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain."

Short Answer

Expert verified
Short Answer: Technological innovation that lowers production costs results in an increase in supply, leading to a lower price and a higher quantity, without affecting the demand curve. Similarly, new information on garlic's health benefits leads to a rightward shift in the demand curve, resulting in a higher price and equilibrium quantity, rather than reducing demand due to increased prices. The price changes are a result of shifts in supply and demand curves, not movements along the curves.

Step by step solution

01

Analyze the impact of technological innovation on supply curve

When there's a technological innovation that lowers the cost of producing a good, this will lead to an increase in supply because producers can make more goods at a lower cost. This shift will be represented by a rightward shift of the supply curve.
02

Show the effect of increased supply on equilibrium price and quantity

When the supply curve shifts rightward, the new equilibrium point will have a lower price and a higher quantity in comparison to the initial equilibrium point, as the intersection of the supply and demand curves moves.
03

Discuss the flaw in reasoning

The statement incorrectly assumes that a fall in price will lead to an increase in demand, moving along the demand curve. However, when the price falls due to the increase in supply, there is no shift in the demand curve. The fall in price is accompanied by an increase in equilibrium quantity, not an increase in demand. Thus, it is misleading to say that higher demand will send the price up again.
04

Conclusion

In conclusion, a technological innovation that lowers the cost of producing a good will generally lead to a reduction in price and an increase in quantity, without affecting the demand curve. #b. The effect of a study on the price of garlic#
05

Analyze the impact of the study on demand curve

When consumers learn that eating a clove of garlic daily can help prevent heart disease, this information will lead to an increase in demand for garlic. This shift will be represented by a rightward shift of the demand curve.
06

Show the effect of increased demand on equilibrium price and quantity

When the demand curve shifts rightward, the new equilibrium point will have a higher price and a higher quantity in comparison to the initial equilibrium point, as the intersection of the supply and demand curves moves.
07

Discuss the flaw in reasoning

The statement incorrectly assumes that the increase in price due to higher demand would cause consumers to reduce their demand for garlic, thus moving along the demand curve rather than shifting it. The increase in demand for garlic is caused by new information about its health benefits, and a higher price is a result of this increased demand. The higher price may lead some consumers to reduce their garlic consumption, but this will only result in a new equilibrium along the shifted demand curve, not a decrease in overall demand.
08

Conclusion

In conclusion, the study that shows the health benefits of garlic will likely lead to a rightward shift in the demand curve, causing the price of garlic to rise and the equilibrium quantity to increase. The ultimate effect of the study on the price of garlic is not uncertain, but rather is determined by the shift in the demand curve.

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Most popular questions from this chapter

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