Cell phones have become very popular. At the same time, new technology has made them less expensive to produce. Assuming that the technological advance caused cost curves to shift downward at the same time that demand was shifting to the right, draw a graph or graphs to show what will happen in the short run and in the long run.
To analyze the effects of the technological advance and the resulting shifts in supply and demand, we can use a supply and demand graph. This will help us understand what happens in the short run and long run.
First, let's understand the impact of the technological advance on the cost of producing cell phones. The decrease in production costs will cause the supply curve to shift downward. Simultaneously, as cell phones become more popular, the demand curve will shift to the right.
Short Run:
In the short run, assuming demand shifts quickly while supply cannot adjust immediately, we will see a temporary imbalance in the market. This is represented by the graph below:
Price
|
P2 |
| \ |
| \ |
| \ |
| \ |
| \ |
| \ |
P1 |_______\|_________
Q1 Quantity
On the graph, the initial demand is represented by the D1 curve intersecting the initial supply curve, S1, at equilibrium point E1, with price P1 and quantity Q1. However, as demand shifts to the right (D2), while supply remains at S1, the market experiences excess demand. Consequently, the equilibrium price increases to P2, and the quantity demanded exceeds the quantity supplied.
Long Run:
In the long run, supply can adapt to changes in demand. As more firms enter the market to take advantage of the reduced production costs, supply increases. The graph below illustrates this:
Price
|
P4 |
| \ |
| \ |
| \ |
| \ |
| \ |
P3 |________\|_____________________
| Quantity
On the graph, the D2 demand curve intersects the new, lower supply curve, S2, at point E2, with a higher equilibrium price of P3 and a higher equilibrium quantity. As supply increases in response to the technological advance, the market moves towards the new equilibrium point E3, where the price decreases to P4, and the quantity settles at a higher level.
In summary, in the short run, the technological advance leads to higher prices and an excess demand situation. However, in the long run, increased supply and competition in the market leads to lower prices and greater availability of cell phones.