ASSIGNMENT NO: 02

Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand, suppose
that technological advance doubles in each market the supply of both products;
A. What happens to the equilibrium price and quantity?
B. Which product experiences a larger change in price?
C. Which product experiences a larger change in quantity?
Explain with suitable diagrams.

Solution:
To above problem can easily be explained with the help of diagram. The left side diagram shows
the market for Pharmaceutical Drugs and the right-side diagram is for computers market. Both
the markets have same pattern of supply side (before & after technological advancement). The
only difference is in their demand side, Pharmaceutical Drugs market has inelastic demand
(steeper demand curve), while computers market has elastic demand (flatter demand curve).

A. The increase in supply reduces the equilibrium price and increases the equilibrium quantity
in both markets (as shown in the above diagram).
B. As the market for pharmaceutical drugs has inelastic demand (steeper demand curve), so, the
increase in supply leads to relatively large decline in the price as compared to the computers
market where the demand is elastic.
C. In the market for computers, with elastic demand (flatter demand curve), the increase in
supply leads to a relatively large increase in quantity.