Answer to Question #230459 in Macroeconomics for Divyanshi Gupta

Question

Suppose the technology to manufacture computers improves but due to some recession in the economy, the income of the consumers falls. Assuming computers to be a normal good, what will be the equilibrium quantity and price for computers in this case?"

Answer 1

Impact on supply due to improvement in manufacturing technology of computer.

If manufacturing technology of normal goods(Computer) improves, the level of production also improves at lower cost that leads to increase in supply in the market. It will shift Supply curve rightwards. It means price level will fall and quantity demanded will increase as shown in the graph.

Impact in demand due to income of consumers fall in recession.

If consumers' income fall due to recession, then they will demand less and demand curve will shift rightwards. In other words , we can say that the extra production will remain unsold in the market. In this situation, price and quantity of the computers will fall together as shown in the graph.

 Combined effect on demand and supply.

If there is improvement in manufacturing technology of normal goods(computers) so the supply curve will shift rightward i.e. excess supply and if the income of consumers fall due to recession then demand curve of computers will shift leftward i.e. indirectly creating excess supply. 

Thus , there is double pressure on price to fall from both forces of demand and supply.

 

(NOTE:- Third graph is just one of the possible situation because graph depends on the degree of changes in demand and supply. Such change can be more/less/equal to each other.