Question

Using separate demand and supply diagrams for A), B), and C) below, explain the effect on the price and quantity of smartphones if: A) The price of a music streaming subscription falls (4 marks) B) Electronics workers’ wages rise (4 marks) C) The events described in A) and B) above occur together (4 marks)

Answer 1

A. In this case, people will start demanding more smartphones. This is because music streaming will happen only on smartphone as both are complements of each other. This will shift the demand curve in the forward direction. The new demand curve will intersect the same supply curve at higher price and higher quantity.

B. If the electronic workers' wages rise, it would mean that the cost of production has risen. Thus, the producers will be able to supply less smartphones at the same prices. This will shift the supply curve backwards. Due to this, the equilibrium price rises and the quantity declines.

C. In this case, we can make three scenarios depending on the extent of fall in supply and rise in demand.

If fall in supply is same as rise in demand , equilibrium price increases but quantity remains same.

If fall in supply is less than rise in demand, equilibrium price rises and quantity rises.

If fall in supply is more than rise in demand, equilibrium price rises and quantity falls.

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