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Supply and Demand Curve Question?

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Supply and Demand Curve Question?

Postby deangelo51 » Sat Jun 16, 2012 2:36 pm

I need help with this economics question. I just need to know how the demand and supply curve would be affected for each scenario and how I would graph each scenario. I am extremely confused by these questions, and am not sure what I should be doing. I have written down what I think would happen, but if someone could correct me or tell me that I'm correct, that would be much appreciated.

Draw a graph that shows how each of the following events will affect the demand, supply, equilibrium price, and equilibrium quantity of compact discs. Note: Be sure to identify whether or not the demand and supply curves shift, or whether you are moving along the demand and supply curves. Assume that the average price of a CD is $ 20 and that 100,000 CDs are sold each week.

a. The price of DVD audio discs decreases ( DVD audio discs can be played in DVD players so the music can be heard in five- speaker surround sound).
If the price of DVD audio discs decreases, demand increases and supply decreases. Equilibrium price and quantity remains the same.

b. The Supreme Court declares sharing music files over the Internet legal and the government is no longer able to prevent music file sharing.
Quantity demanded would decrease and supply would eventually decrease as well. The demand curve would shift to the left, and the supply curve would shift to the right. There would be a new equilibrium price and equilibrium quantity.

c. The technology used to manufacture CDs improves, decreasing the cost of producing a CD.
The supply curve would shift to the right because more CDs are able to be produced at lower prices. Demand would increase, but would not shift. There would be a new equilibrium price and equilibrium quantity.

d. An economic boom causes wages for workers to increase in all sectors of the economy, so CD consumers have more money but CD producers have to pay more to workers.
The cost of CDs would go up to compensate the workers, but consumers also have more money; the supply of CDs would increase and demand would decrease slightly.

e. The use of iTunes becomes widespread.
The demand curve would shift to the left as demand decreases, and as prices dropped, I would move down the supply curve. There would be a new equilibrium price and quantity.
deangelo51
 
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Joined: Sat Apr 02, 2011 6:41 am

Supply and Demand Curve Question?

Postby chavivi » Sat Jun 16, 2012 2:44 pm

Scenario (A): DVD audio discs can be played in DVD players so the music can be heard in five- speaker surround sound). So the product could either be a DVD player, or a DVD audio disc.

You can debate this question a little. Does the DVD player get made better so that it NOW play stuff in 5 speaker surround? Or is the DVD disc now made better so that it can be played in DVD players?

Now we do know that discs and players are complementary goods like sugar and coffee right? It is likely, that regardless of whichever product has been improved, consumers would buy more of either one. So demand for both dvd players and dvd discs would increase.

So drawing the curve. In the short run supply is unchanged, so demand shifts to the right, raising the price and quantity demanded to beyond $20 and beyond 100,000.

Supply might change with additional information such as basic supply factors; like some dude just discovered a magic genie that automatically crafts CDs out of thin air.

Scenario B)

The Supreme Court declares sharing music files over the Internet legal and the government is no longer able to prevent music file sharing.

How do we define "file sharing"? Does it mean transfer over the internet? Or does it mean burning CDs regardless of copy-right restrictions? Depending on the assumptions, this question can be debated.

If we assume 'sharing music' involves the production of CDs. This new legal provision makes it easier or provides an incentive for people to share music. This is a supply factor. Again take a short-run approach. Since Mr Pirate is no longer subject to laws that could imprison him for "sharing" music, he is now able to share music without consequence.

So the supply would shift to the right, with demand unchanged. So price of CDs would drop and quantity demanded would fall.

HOWEVer we can debate this a little bit;

What IF "sharing music" does NOT involve the production of CDs at all? Since sharing is done over the internet, or wirelessly, or using portable hard-drives. Can we assume that people "share" music (illegally) simply because they wish to avoid paying the price of a CD?

If we hold these assumptions, then the demand for CDs will fall, since CDs will be a little bit like... like.... chunky mobile phones from the 80s, who the hell needs them? And if the demand for CDs falls, with supply unchanged in the short run, price of CDs and quantity demanded drops.

Scenario C: The technology used to manufacture CDs improves, decreasing the cost of producing a CD.

(You have quite a good answer here). "The supply curve would shift to the right because more CDs are able to be produced at lower prices. " Yes this is true since we are talking about a supply factor in improved technology.

However, if we look at the short run, let's not talk about demand, just keep it to supply. Do not say "demand would increase, but would not shift," just say simply "quantity demanded will increase" or "quantity supplied will increase," since you are just saying that the quantity on the X-axis will increase in value at the new equilibrium.

Scenario D: An economic boom causes wages for workers to increase in all sectors of the economy, so CD consumers have more money but CD producers have to pay more to workers.

*Bad answer*. Why is your answer bad? Because of the phrasing, you need to use economics terminology. I think you have the good sense in the answer, I think you get the logic of what should happen, but you need to express it better.

Better answer: Because of higher wages for workers working to produce CDs, the cost of producing CDs rises because of this supply factor. Thus supply of CDs will shift to the left.

****Please double check this assumption of mine mentioned in this paragraph***** Also, the demand curve should shift simply because of an increase in disposable wealth (because of the economic boom). Demand should shift to the right.

Thus how do you draw this? Supply curve shifts left, demand curve shifts right, causing a new equilibrium in a higher price (for sure), and a changed quantity supplied or demanded (depending on how you draw the curves).

More bashing on your answer: Do not just say things like "demand will decrease and supply would increase" because it is vague. Do you mean curves will shift? Or do you mean quantity demanded on either curve will increase/decrease? Please be more specific in your descriptions.

Demand does not decrease because the main factor here is NOT a price-change in CDs. Demand would only decrease if the scenario was "the price of CDs goes up" and that alone. But no, the scenario is a rise in wages, coupled together with an economic boom. So please concentrate SIMPLY on the scenario they give you.

Your answer for Scenario E is okay in terms of logic but not in phrasing.
chavivi
 
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Joined: Fri Apr 01, 2011 11:59 am


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