Suppose Intel Inc. and other chip makers utilize a new techology for producing the flash memory chips used in digital music players. How would you Illustrate and Explaine the resulting effects on the Equilibrium price and quantity in the flash chip market and the digital player market.
Draw simple supply and demand curves. The new technology, likely, lowers the cost of production at all levels. So, shift the supply curve out. What happens to price? quantity?
To illustrate the effects of the new technology on the equilibrium price and quantity in the flash chip market and the digital player market, we can start by drawing simple supply and demand curves for both markets.
Let's begin with the flash chip market:
1. Flash Chip Market:
- Draw a vertical axis for price and a horizontal axis for quantity.
- Draw a downward-sloping demand curve to represent the demand for flash chips. This curve shows the relationship between the price of flash chips and the quantity demanded by buyers.
- Draw an upward-sloping supply curve to represent the supply of flash chips. This curve shows the relationship between the price of flash chips and the quantity supplied by sellers.
- Initially, let's assume that the supply and demand curves intersect at a point, representing the equilibrium price and quantity in the flash chip market before the new technology is introduced.
Now, let's introduce the new technology in the production of flash chips, which lowers the cost of production:
- Due to the lower costs, the supply curve shifts outward to the right (to the right of the original supply curve), indicating that sellers are willing to supply a greater quantity at each price level. This is because the new technology makes production more efficient and less expensive.
What happens to price and quantity?
- As the supply curve shifts outward, the equilibrium price of flash chips will decrease. This is because the increase in supply leads to a greater availability of flash chips in the market, which puts downward pressure on prices.
- The equilibrium quantity of flash chips in the market will increase. This is because the increased supply leads to a greater quantity being produced and sold at the new equilibrium price.
Next, let's move on to the digital player market:
2. Digital Player Market:
- Draw a vertical axis for price and a horizontal axis for quantity.
- Since flash chips are a key component in digital music players, the price and quantity of digital players are directly affected by changes in the flash chip market.
- Assume initially that the digital player market is in equilibrium, with a specific price and quantity before the introduction of the new technology in the flash chip market.
Now, let's consider the impact of the lower cost of flash chips due to the new technology:
- As the cost of producing flash chips decreases, the supply of flash chips available to digital player manufacturers increases. This means that digital player manufacturers can now produce and sell a greater quantity of players at the same price.
What happens to price and quantity?
- The equilibrium price of digital players will decrease. This is because the increased supply of flash chips decreases the cost of production for manufacturers, allowing them to reduce the price of digital players while still maintaining their profit margins.
- The equilibrium quantity of digital players will increase. The lower cost of flash chips enables manufacturers to produce more players at the same price, leading to a higher quantity being available in the market.
Overall, the new technology in flash chip production leads to a decrease in both the equilibrium price and an increase in the equilibrium quantity in both the flash chip market and the digital player market. This is due to the lower production costs, which allow for more supply and subsequently lower prices in both markets.