PROBLEM: With the aid of suppl

PROBLEM:

With the aid of supply and demand diagrams (you need an explicitdiagram for each case), show andexplain how and why we would expectprices and quantities to changein the market for Compact Discs (CDs) in each of the followingsituations when:

(a) Technical improvements lead to a fall in the cost ofproducing CDs.(b) Technical improvements lead to a fall in the cost of producingMP3 players.(c) Technical improvements lead to a fall in the cost of producingCD-players.(d) Streaming music services, such as Spotify, AccuRadio, andGrooveshark, etc. become widely available(e) Congress passes laws making streaming music services, such asSpotify, AccuRadio, and Grooveshark, etc. illegal.

Answer:

a) Technical improvement lead to fall in costof producing CDs will raise profit level of CDs producers whichinduce them to produce more of CDs and raise its aggregate supply.It will shift aggregate supply curve to its right from AS to AS1while demand remains the same. It tends to reduce price level fromP to P1 and raise output from Y to Y1.

b) Fall in cost of producing MP3 will reducethe price of MP3 and reduce demand of CDs because consumers lookfor cheaper alternative available. It will shift aggregate demandcurve of CD to its left from AD to AD1 which tends to reduce pricefrom P to P1 and reduce output from Y to Y1.

c) As CD players and CDs are complements toeach other. Fall in cost of producing CD-players will leave moremoney with consumers to spend on CDs which will raise aggregatedemand. Rise in aggregate demand shift aggregate demand curve fromAD to AD1 which raise price level from P to P1 and raise outputlevel from Y to Y1.

d) Music services such as Spotify, AccuRadioetc. become widely availabl. These goods tends to reduce aggregatesupply of CDs which shift aggregate supply curve to its left fromAS to AS1 while aggregate demand remains the same. It will raiseprice from P to P1 and reduce output from Y to Y1.

e) If Spotify, AccuRadio etc. are illegal,consumers will again prefer CDs which will raise aggregate demandof CDs and shift aggregate demand curve to its right. Rise inaggregate demand shift aggregate demand curve from AD to AD1 whichraise price level from P to P1 and raise output level from Y toY1.


 
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