Answer to Question #106524 in Microeconomics for Bitelhem Frezgi

Question

A student writes the following: “In the past 15 years, technological advancements have led to an increase in the production of computers. This causes the price of computers to fall. As a result, demand for computers have risen since more people can now afford to buy computers”. Is this analysis true or false? Explain.

Answer 1

This analysis is true, but too simplified. There are more factors, than just change of price and demand and their order is other than the student describes.

At first, technological advancements have led to reduction in production costs, as a result of progress and economies of scale, which was caused the growing demand (Demand can grow up without price reduction, just because of fashion, a growing interest in technology and development of science). Secondly, decrease of costs allowed to reduce prices. Finally, it is true that due to the lower prices now more people can afford to buy a computer. That is why demand for computers grew up.