Answer to Question #303934 in Microeconomics for zar

Question

The cost of producing Blu-ray DVD players has fallen over the past few years. Let’s consider some implications of this fact.

a. Use a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of Blu-ray DVD players sold.

b. In your diagram, show what happens to consumer surplus and producer surplus.

c. Suppose the supply of Blu-ray DVD players is very price elastic. Who benefits most from falling production costs – consumers or producers of Blu-ray DVD players?

Answer 1

a). Use a supply-and-demand diagram to show the effect of falling production costs on the price and quantity of Blu-ray DVD players sold.

Falling cost of production will lead to increased production of Blu-ray DVD players. This will lower the price and in turn increase their demand. See diagram below:

b). In your diagram, show what happens to consumer surplus and producer surplus

c). Suppose the supply of Blu-ray DVD players is very price elastic. Who benefits most from falling production costs – consumers or producers of Blu-ray DVD players?

Consumers will benefit buy not as compared when it is inelastic.