Chapter 3: Problem 54

The computer market in recent years has seen many more computers sell at much lower prices. What shift in demand or supply is most likely to explain this outcome? Sketch a demand and supply diagram and explain your reasoning for each. a. A rise in demand b. A fall in demand c. A rise in supply d. A fall in supply

Short Answer

Expert verified

The most likely scenario to explain the outcome of more computers being sold at much lower prices is a rise in supply (option c). A rise in supply leads to a new equilibrium where both the price decreases, and the quantity of computers sold increases.

Step by step solution

1. Draw a basic demand and supply diagram

Begin by sketching a basic demand and supply diagram for the computer market. Label the axes: horizontal axis as "Quantity of Computers," and the vertical axis as "Price". In this diagram, the demand curve (D) slopes downward from left to right, representing the law of demand, and the supply curve (S) slopes upward from left to right, illustrating the law of supply.

2. Analyze the impact of a rise in demand

First, consider a rise in demand on the computer market. When demand increases, the demand curve shifts to the right (D1). This will result in a new equilibrium at a higher price level (P1) and a higher quantity of computers sold (Q1). Although the quantity of computers sold increases, the prices also increase, which does not align with the given outcome.

3. Analyze the impact of a fall in demand

Next, analyze the effect of a fall in demand on the computer market. When demand decreases, the demand curve shifts to the left (D2). This leads to a new equilibrium at a lower price level (P2) and a lower quantity of computers sold (Q2). Both the price and quantity decrease in this scenario, which again, does not match the given outcome.

4. Analyze the impact of a rise in supply

Now, consider the effect of a rise in supply on the computer market. When supply increases, the supply curve shifts to the right (S1). This results in a new equilibrium at a lower price level (P3) and a higher quantity of computers sold (Q3). Both the price decreases and the quantity increases, which aligns with the outcome statement: more computers are sold at much lower prices.

5. Analyze the impact of a fall in supply

Lastly, examine the impact of a fall in supply on the computer market. When supply decreases, the supply curve shifts to the left (S2). This leads to a new equilibrium at a higher price level (P4) and a lower quantity of computers sold (Q4). Both the price and quantity move in opposite directions from the given outcome.

6. Determine the most likely scenario to explain the outcome

Upon analyzing each shift in demand and supply, the most likely scenario to explain the outcome of more computers being sold at much lower prices is a rise in supply (option c). This is because a rise in supply leads to a new equilibrium where both the price decreases, and the quantity of computers sold increases.