Question

How will a simultaneously increase in the price of substitute good and an improvement in production technology affect market demand and/or supply, equilibrium quantity in a competitive market.

Answer 1

Answer on Question # 89228, Economics / Microeconomics

QUESTION: How will a simultaneously increase in the price of substitute good and an improvement in production technology affect the market demand and/or supply, equilibrium quantity in a competitive market.

ANSWER:

Effect of increase in the price of substitute good on demand curve: Increase in the price of a substitute good causes a rise in quantity demanded. Hence, the Demand curve will shift to the right as a result of increase in price of substitute good.

Effect of improvement in production technology on supply curve: The use of advancement in production technology increases productivity, hence the production of goods and services becomes more profitable. Therefore, improvement in the current state of technology causes supply to increase and supply curve to shifts to the right.

Effect on equilibrium quantity in a competitive market: As a result of rightward shifts in demand and supply curves, the new market equilibrium will be determined at E1 as shown in figure below. At this point the equilibrium price will remain same but the quantity demanded and supplied will equate at a greater equilibrium quantity than that at earlier equilibrium.

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