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Explaining Economic Changes
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A new technology has been introduced that significantly reduces the production costs for a popular consumer good. In response, the market price of this good decreases while the quantity sold increases. How would you explain the economic changes using the principles of marginal analysis and derived demand?

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Choose the Best Answer

A

The decrease in production costs leads to higher profits, which motivates producers to supply more of the good, causing the price to fall.

B

The technological advancement shifts the supply curve to the right, leading to a lower price and higher quantity sold, reflecting derived demand from consumers seeking the cheaper product.

C

The reduction in price indicates a decrease in consumer demand, which is why the quantity sold increases.

D

The introduction of technology has no effect on the market equilibrium since demand remains constant regardless of production costs.

Understanding the Answer

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Answer

When a new technology lowers production costs for a popular consumer good, it makes it cheaper for companies to produce more of that good. This leads to a decrease in the market price because companies can afford to sell it at a lower price while still making a profit. As the price drops, more consumers are willing to buy the good, which increases the quantity sold. Marginal analysis helps us understand this change by showing that consumers will buy more of the good as long as the price is lower than the value they place on it. For example, if a new smartphone becomes cheaper due to better technology, more people will buy it, leading to higher sales and benefiting both the consumers and the producers.

Detailed Explanation

When production costs go down, producers can make more goods for less money. Other options are incorrect because This answer suggests that higher profits lead to more supply; This option says that lower prices mean less demand, which is incorrect.

Key Concepts

Marginal Analysis
Derived Demand
Market Equilibrium
Topic

Explaining Economic Changes

Difficulty

medium level question

Cognitive Level

understand

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