How will a simultaneous increase in the price of substitute goods and an improvement in production technology affect market demand and low supply, equilibrium price and equilibrium quantity in a competitive market?
To understand how a simultaneous increase in the price of substitute goods and an improvement in production technology will affect market demand and supply, as well as equilibrium price and quantity, it is helpful to break it down into several steps:
Step 1: Understand the concept of substitute goods
Substitute goods are products that can be used as alternatives to each other. For example, if the price of coffee increases, some consumers might switch to drinking tea instead. In this case, coffee and tea are considered substitute goods.
Step 2: Understand the impact of a price increase in substitute goods on demand
When the price of substitute goods increases, consumers typically tend to switch their purchases towards the lower-priced alternatives. This leads to an increase in demand for the substitute goods.
Step 3: Understand the impact of an improvement in production technology on supply
An improvement in production technology usually leads to an increase in the efficiency of production. This increase in efficiency can result in a larger quantity of goods being produced at a lower cost. As a result, the supply of the goods increases.
Step 4: Determine the combined effect on market demand and supply
With an increase in demand for the substitute goods and an increase in supply due to an improvement in production technology, two things happen:
1. The demand curve shifts to the right, indicating an increase in demand.
2. The supply curve also shifts to the right, indicating an increase in supply.
Step 5: Analyze the impact on equilibrium price and quantity
The simultaneous increase in demand and supply means that both equilibrium price and quantity will increase.
1. Equilibrium price: The increase in demand will put upward pressure on the price, while the increase in supply will put downward pressure. However, if the increase in demand is greater than the increase in supply, the equilibrium price will rise.
2. Equilibrium quantity: Both the increase in demand and supply will lead to an increase in equilibrium quantity. However, the exact change in equilibrium quantity will depend on the magnitude of the shifts in demand and supply.
Overall, a simultaneous increase in the price of substitute goods and an improvement in production technology will result in higher equilibrium price and quantity in a competitive market.