Question

The cost of many electronic devices has fallen appreciably since they were first introduced. For instance, computers, mobile phones, microwave ovens and calculators not only provide more functions but also do so at a lower cost. Illustrate the impact of lower production costs on the supply curve. What happens to the size of the consumer surplus and producer surplus? If consumer demand for mobile phones is relatively elastic, who is likely to benefit the most from the lower production costs?

Answer 1

1. If a firm experiences a lower costs of production through all the factors of production without changing the price, the firms's profits will rise tremendously and then it tends to supply more and is shown in the graph generally by its shift to the right i.e supply curve shifting to the right.

2. In this case, producer surplus is attained as price remains unchanged with lower costs of production as the demand is heavy.

3. With lower costs of production, firms are benefited more compared to consumers as the demand is relatively elastic with the price remains unchanged. But if the price is changed, then there would heavy shifts in both the demand and the supply curves as the demand is relatively elastic which is sensitive to price.