Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market? b. Which product experiences a larger change in price? c. Which product experiences a larger change in quantity? d. What happens to total consumer spending on each product?
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What happens to the equilibrium price and quantity in each market? b. Which product experiences a larger change in price? c. Which product experiences a larger change in quantity? d. What happens to total consumer spending on each product?
Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market? b. Which product experiences a larger change in price? c. Which product experiences a larger change in quantity? d. What happens to total consumer spending on each product?
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To analyze the impact of a technological advance on the equilibrium price, quantity, and total consumer spending of pharmaceutical drugs and computers, we need to consider the concepts of demand and supply elasticity.
a. Impact on Equilibrium Price and Quantity:
1. Pharmaceutical Drugs: With an inelastic demand, the quantity demanded for pharmaceutical drugs does not change significantly when the price changes. Assuming the demand curve remains unchanged, the increase in supply will result in a surplus of pharmaceutical drugs in the market. As a result, the equilibrium price of pharmaceutical drugs will decrease, while the equilibrium quantity will increase.
2. Computers: With an elastic demand, the quantity demanded for computers is more responsive to changes in price. A doubling of supply will cause a surplus, resulting in a larger decrease in the equilibrium price. Additionally, the equilibrium quantity of computers will also increase due to the increased availability.
b. Product with a Larger Change in Price:
Considering that computers have an elastic demand, they will experience a larger change in price compared to pharmaceutical drugs. Since the increase in supply leads to a larger surplus and the demand for computers is more price-sensitive, the equilibrium price of computers will decrease more substantially.
c. Product with a Larger Change in Quantity:
As mentioned earlier, the demand for pharmaceutical drugs is inelastic. Consequently, the change in quantity will be relatively smaller compared to the change in computers. With a doubling of supply, computers will experience a larger increase in quantity due to the responsiveness of demand to changes in price.
d. Impact on Total Consumer Spending:
Total consumer spending is calculated by multiplying the equilibrium price by the equilibrium quantity in each market.
1. Pharmaceutical Drugs: With a decrease in the equilibrium price and a relatively smaller increase in quantity, the change in total consumer spending on pharmaceutical drugs will depend on the magnitude of the changes. If the decrease in price is substantial enough to offset the smaller increase in quantity, total consumer spending may decrease or remain relatively stable.
2. Computers: Since the equilibrium price of computers decreases significantly and the equilibrium quantity increases due to the larger price elasticity of demand, total consumer spending on computers will likely increase. The decrease in price, combined with the greater increase in quantity, will contribute to higher total spending on computers.
In summary, a technological advance that doubles the supply of both pharmaceutical drugs and computers will result in a decrease in the equilibrium price for both. However, computers will experience a larger change in price and quantity due to their elastic demand. Total consumer spending on pharmaceutical drugs may decrease or remain stable, while spending on computers will likely increase.