Question

(i) The huge advertisement campaign by Huawei for its new 5G technology and new sets of Smart Phones has turned out to be very successful in Canada, leading to large improvement in sales volume. (ii) At the same time, and partly responding to pressures from the Government of Canada, Huawei announced that it is moving some of its manufacturing of smartphones to Canada, because it can use cheaper automated processes here.

Examine the two statements above, considering what we learned in Chapters 3 and 4 of the textbook and answer the following questions, with respect to the two parts.

[Hint: For full points, it may be better to answer each question (a) to (d), for each statement. And lease draw ALL appropriate diagrams.]

(a) Which curve is affected?

(b) Is price the issue, or is it something else besides price?

(c) Is the change an increase or a decrease?

(d)  How much Change is involved?

Answer 1

(a)

Both demand and supply curves are affected.

The advertising which has led to higher sales implies an increase in demand. Ability to process at lower cost will reduce manufacturing cost, which will increase output, implying an increase in supply.

(b)

Demand is affected by a non-price determinant, viz. consumer tastes and preferences moving toward the product.

Supply is affected by a non-price determinant, viz. lower cost of production.

(c)

Demand will increase and Supply also will increase.

(d)

Increase in demand will shift demand curve to right, increasing price and increasing quantity. Increase in supply will shift supply curve to right, decreasing price and increasing quantity. The net effect is a definite increase in quantity, but effect on price is uncertain.

In all the following graphs, bond price (P) and quantity (Q) are measured along vertical and horizontal axes, respectively. D0 and S0 are initial bond demand and supply curves, intersecting at equilibrium point A with initial equilibrium price P0 and equilibrium quantity Q0.

Net effect on price has three possible scenarios:

(1) Rightward shift in demand is higher than the rightward shift in supply: Price is higher

In following graph, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with higher price P1 and higher quantity Q1.

(2) Rightward shift in demand is lower than the rightward shift in supply: Price is lower

In following graph, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with lower price P1 and higher quantity Q1.

(3) Rightward shift in demand is equal to the rightward shift in supply: Price stays same

In following graph, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with same price P0 and higher quantity Q1.