Question

The market for a good is in equilibrium. Explain, using a diagram, how an improvement in technology for producing the good would affect the equilibrium price and equilibrium quantity, keeping other factors constant.

Answer 1

As the an improvement in technology for producing the good, supply of the commodity also increases. Which results in the rightward shift of supply curve. Due to increase in supply and demand remains constant the equilibrium price will decrease and equilibrium quantity will increases.

In the present diagram D and S are respectively initial demand and supply curves. ‘E’ is the initial equilibrium point where equilibrium price is OP and equilibrium quantity is OQ. As the input improvement in technology supply curve shifts rightwards (due to increase in supply) and becomes S₁. Due to that equilibrium point shifts to E₁ and equilibrium price falls to OP₁ and equilibrium quantity rises to OQ₁ .