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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

One of the largest changes in the economy over the past several decades is that technological advances have reduced the cost of making computers.

a. Draw a supply-and-demand diagram to show what happened to price, quantity, consumer surplus, and producer surplus in the market for computers.

b. Forty years ago, students used typewriters to prepare papers for their classes; today they use computers. Does that make computers and typewriters complements or substitutes? Use a supply-and-demand diagram to show what happened to price, quantity, consumer surplus, and producer surplus in the market for type- writers. Should typewriter producers have been happy or sad about the technological advance in computers?

c. Are computers and software complements or substitutes? Draw a supply-and-demand diagram to show what happened to price, quantity, consumer surplus, and producer surplus in the market for software. Should software producers have been happy or sad about the technological advance in computers?

d. Does this analysis help explain why software producer Bill Gates is one of the world's richest people?

Subpart (a):

To determine
The impact of falling prices of computers and its impact on typewriters.

Explanation

When the cost of producing computers falls, the supply of the computers in the economy will increase. This will lead to a rightward shift in the supply curve of the computers. As a result of this rightward shift, the price of the computers will fall and the quantity demanded will increase. This can be illustrated as follows:

From the above graph, it can be identified that when there is a rightward shift in the supply curve for the computers due to the fall in the cost of producing the computers, there will be a new equilibrium and this will be determined below the existing one. As a result of this, the price will fall from P1 to P2 and the quantity will rise from Q1 to Q2.

Before the shift in the supply curve, the equilibrium price and quantity were P1 and Q1. The consumer surplus at this point was the area of A as denoted in the diagram. However, after the fall in the production cost of computers, the consumer surplus increased, and thereby increasing the area to B+C+D. This implies that the consumer surplus increases from area of A to area of A+B+C+D.

Before the shift in the supply curve towards the right due to the fall in the cost of producing computer, the producer surplus was the area of B+E...

Subpart (b):

To determine
The impact of falling prices of computers and its impact on typewriters.

Subpart (c):

To determine
The impact of falling prices of computers and its impact on typewriters.

Subpart (d):

To determine
The impact of falling prices of computers and its impact on typewriters.

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