Suppose we observe the following two simultaneous events in the market for eReaders (like Kindles)
(12-point question): Suppose we observe the following two simultaneous events in the market for eReaders (like Kindles). First, there is a decrease in the demand for eReaders due to the popularity of computer tablets on which books can be read. Second, there is a reduction in the supply of eReaders due to a tax placed on an important component of eReaders. Follow the instructions below to explain the effects of these two events on the equilibrium price and quantity of Readers .
On a piece of paper (not to be turned in or attached; there's no way to do that), draw yourself a supply/demand graph showing the market for eReaders in equilibrium.
In the answer box below, explain these things
How you labeled the axes on your graph
What the demand curve looks like
What the supply curve looks like
How you found equilibrium price and quantity
On the graph you are drawing for yourself, show the effects of the decrease in demand for eReaders and then the decrease in supply of Readers.
In the answer box below, explain these things
Which curve(s) shifted and which direction they shifted
The effect on equilibrium price and quantity
Homework Answers
Horizontal axis shows quantity of eReaders and Vertical axis shows price of eReader.
Demand curve is downward sloping due to inverse relationship between price and quantity demanded of good.
Supply curve is upward sloping because of positive relationship between price and quantity supplied of a good.
Equilibrium is where demand curve intersects supply curve.
Demand and supply curve shift leftwards due to decrease in demand and supply of eReaders.
Equilibrium quantity decreases but effect on price is ambiguous. When decrease in supply is greater than decrease in demand then equilibrium price rises. When decrease in demand is greater than decrease in supply then equilibrium price falls. When decrease in demand is equal to decrease in supply then price remains same.
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Suppose we observe the following two simultaneous events in the market for eReaders (like Kindles)
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