Question

Find the flaw in reasoning in the following statement, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. In the accompanying diagram, shift the demand and/or supply curves and move the equilibrium point to its new position to illustrate what actually occurs in each situation. a. "A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovati g

Answer 1

Answer / Explanation:

(a) This statement confuses a shift of a curve with a movement along a curve.

A technological innovation lowers the cost of producing the goods leading producers to offer more of the good at any given price.

According to the supply and demand curve below,  the statement is represented by a rightward shift of the supply curve from S1 to S2.

As a result, the equilibrium price falls and the equilibrium quantity rises, as shown by the change from E1 to E2.

Also, The statement "but a fall in price will increase demand for the good, and higher demand will send the price up again" is wrong for the following reasons.

A fall in price increase the quantity demanded and leads to an increase in the equilibrium quantity as one moves down along the demand curve. But it does not lead to an increase in demand consequentially, a rightward shift of the demand curve and therefore does not cause the price to go up again.