"The price of digital cameras fell because of improvements in production technology. As a result, the demand for non-digital cameras decreased. This caused the price of non-digital cameras to fall; as the price of non-digital cameras fell the demand for non-digital cameras decreased even further." Evaluate this statement.

Question

BlackTom AI · Accepted Answer

Reframing the question in my own words: we’re evaluating a chain of causal claims about how price changes in digital cameras and non-digital cameras (two substitutes) affect demand and price for each other, and whether the depicted sequence is plausible.
Option 1: 'The statement is false. A decrease in the price of digital cameras would decrease the demand for non-digital cameras, but a decrease in the price of non-digital cameras would not cause the demand for non-digital cameras to decrease.'
This option correctly notes the substitutability between the two camera types: when the price of digital cameras falls, consumers substitute away from non-digital cameras, reducing their demand. The second clause correctly rejects the idea that a fall in the price of non-digital cameras would lead to a further decrease in demand for non-digital cameras; in standard demand theory, a fall in price increases the quantity demanded of that good, not decreases it. The statement’s proposed feedback loop—lower prices causing falling demand in both goods—fails to align with the basic law of demand and with cross-price effects for substitutes.
Option 2: 'The statement is false because digital camera producers would not reduce their prices as a result of improvements in technology; doing so would reduce their profits.'
This reasoning relies on profit motives to assume producers would never lower prices after technological improvements. In reality, firms often lower prices after productivity gains to capture market share, deter rivals, or pass savings to consumers. The claim that they would not reduce prices is not a universal truth and ignores standard competitive dynamics; thus this explanation is too narrow and misses the fundamental supply-and-demand interaction at play.
Option 3: 'The statement is false because it confuses the law of demand with the law of supply.'
The core issue in the scenario is how relative prices affect demand for substitutes (a demand-side effect) and the resulting market outcomes. While the law of supply could be involved in explaining how prices move, the description primarily concerns demand responses to price changes and cross-price effects. Saying the error is a confusion of the laws conflates two related but distinct ideas, but it doesn’t precisely pinpoint why the chained demand outcome is implausible. Therefore this justification is not the most accurate critique of the scenario.
Option 4: 'The statement is false because the demand for non-digital cameras would increase as the price of digital cameras fell.'
This option highlights the cross-price effect: when digital cameras become cheaper, non-digital cameras—being substitutes—see a drop in demand. The statement that non-digital demand would decrease further as its own price falls is inconsistent with the law of demand for the non-digital good itself (a fall in its price would typically increase quantity demanded) and with the substitution effect from the cheaper digital option. Therefore, this reasoning addresses the substitution mechanism correctly and identifies the flaw in the chained description.
In summary, each option attempts to diagnose why the original chained claim is flawed, with varying degrees of precision. The most direct critique focuses on the substitution effect between the two camera types and the direction of demand responses to price changes for substitutes.

Spr25_ECON001A_39193 Exam #1 on Chapters 1, 2, 3, 7

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