Question

You are the manager of a midsized company that assembles personal computers. You purchase most components – such as random access memory (RAM) – in a competitive market. Based on your marketing research, consumers earning over $80,000 purchase 1.5 times more RAM than consumers with lower income. One morning, you pick up a copy of the Wall Street Journal and read an article indicating that input components for RAM are expected to rise in price, forcing manufacturers to produce RAM at a higher unit cost.

Based on this information, what can you expect to happen to the price you pay from RAM? Would your answer change if, in addition to this change in RAM input prices, the article indicates that consumer incomes are expected to fall over the next two years as the economy dips into recession? Please explain in great detail.

Answer 1

If the cost of input increases in the market, the price of RAM will also increase. This increase in the price of RAM will shift the supply curve to left. This leftward shift in the RAM's supply will cause the price of RAM to rise as compared to the earlier one.

Due to the reduction in income of the consumer purchasing power will reduce. As less disposable income is available with the consumer to spend, he/she will demand less of the product forcing the demand curve to shift leftward and compelling the price to fall.