Question

When a new, faster computer chip is introduced, demand for computers using the older, slower chips decreases. Simultaneously, computer makers increase their production of computers containing the old chips in order to clear out their stocks of old chips.

1. Draw two diagrams of the market for computers containing the old chips: one in which the equilibrium quantity falls in response to these events and one in which the equilibrium quantity rises.
2. What happens to the equilibrium price in each diagram?

Short answer

a. When the equilibrium quantity falls:

When the equilibrium quantity rises:

b. The equilibrium price falls in each diagram.

Step-by-step solution

Explanation for part (a)

• The quantity falls when the size of the fall in demand is more than the rise in supply.

The above diagram shows that the leftward shift in the demand curve (due to greater demand for new chips) is greater than the forward shift in the supply curve (production of computers containing old chips). As a result, the quantity falls.

• The quantity increases when the size of the fall in demand is less than the rise in supply.

The above diagram shows that the forward shift in the supply curve is greater than the backward shift in the demand curve, resulting in a rise in equilibrium quantity.

Explanation for part (b)

The price will fall in both situations as there is an increase in supply and a fall in demand; thus, the price will fall. The change in quantity depends on the degree of change in demand and supply.