7. Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually hap- pens 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 innovation will really reduce price in the end." b. "A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to denmand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain." 33
7. Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually hap- pens 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 innovation will really reduce price in the end." b. "A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to denmand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain." 33
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:**Analyzing Flaws in Supply and Demand Reasoning**
When evaluating economic scenarios, it's crucial to understand the distinction between shifts of and movements along supply and demand curves. The following statements contain reasoning flaws which can be better understood by examining these concepts.
**a. Technological Innovation Impact on Prices**
"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 innovation will really reduce price in the end."
**Analysis:**
- The statement assumes that increased demand due to lower prices will negate the initial price reduction from cost-saving innovation.
- A technological advance typically results in a rightward shift in the supply curve, leading to initially lower equilibrium prices.
- While demand may increase, leading to movement along the curve, it shouldn't completely offset the supply increase unless perfectly elastic.
**b. Garlic Demand and Price Fluctuation**
"A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain."
**Analysis:**
- This statement reflects cyclical reasoning, where initial demand increase leads to price rise, which then decreases demand.
- An increase in demand shifts the demand curve rightward, initially raising prices.
- The assumption that prices will cyclically fall assumes highly elastic demand, where the initial price increase significantly deters consumption.
- Market equilibrium will ultimately depend on the elasticity of both supply and demand.
**Graphical Illustration Suggestions**:
1. **For Scenario (a)**: Draw two supply curves, one initial (left shift) and one post-innovation (right shift). Show movement along the demand curve as price lowers.
2. **For Scenario (b)**: Illustrate a rightward demand shift resulting in a higher price, then show movement back along the new demand curve if price elasticity significantly affects quantity demanded.
In both cases, clear understanding of elasticity and curve shifts is key in predicting outcomes.
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