Individual assignment 2

2.1 Demand and supply

During the 1990s, technological advances reduced the cost of computer chips. How do you think
this affected the market for computers? For computer software? For typewriters?

Answer:

S1
P
S2

P1 E1
E2
P2

Q1 Q2
Q
Computers

The decline in the price of computer chips caused a lower cost of producing computers. Hence, its
quantity supplied would increase, leading the supply curve to shift to the right (S1→S2), indicating
an increased supply of computers in the market. Furthermore, the more the price of computers falls
(P1→P2), the more its quantity demanded rises (Q1→Q2). At this point, the equilibrium price would
drop from E1 to E2.

1
 P S

P2
E2
P1 E1

D2

D1

Q1 Q2 Q
Computer Software
Since computer software is a complement to computers, when the price of computers decreased,
the demand for software increased, resulting in the demand curve shifting to the right (D1→D2).
This created a shortage of software; then, companies had to raise its price to ensure equilibrium to
the market (E1→E2). Thus, when the price of computers fell, the equilibrium price and quantity of
software would rise.

P S

P1
E1
P2 E2

D1

D2

Q2 Q1 Q
Typewriters
Since typewriters are a substitute to computers, a decline in computers’ price created a decline in
the demand for typewriters, making the demand curve shift to the left (D1→D2). There would be
a surplus in typewriters; then, companies had to lower its price to ensure equilibrium (E1→E2).
Therefore, as the price of computers reduced, so would the equilibrium price and quantity of
typewriters in the market.

2
2.2 Taxes

If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more
than $500, less than $500, or exactly $500? Explain.
Answer:

P
S

Price buyers pay

Price without tax •
Price sellers receive •
D

Luxury cars Q

Because luxury items, particularly cars, are not essential goods, they have an elastic demand curve
and an inelastic supply curve. In addition, according to the burden of tax policy, the tax rate is
divided between both buyers and sellers. Accordingly, when a tax is levied on luxury automobile
buyers, the amount they pay is higher and the amount the sellers receive is lower than the price
without tax. The figure above depicts all of this. In the figure, with a $500 tax implemented by the
government, the change in the amount received by the sellers is notably more than the change in
the amount paid by the buyers, indicating that the burden of tax falls more on high-end automobile
sellers rather than buyers. As a result, the actual cost to buyers will be less than $500.

References

Mankiw, N.G., 2018. Principles of microeconomics.

Mankiw, N.G., 2020. Principles of economics. Cengage Learning.