Hi guys,
Please help me with the question from CFA website. Many thanks.
0.0% complete
Question
A wireless phone manufacturer introduced a next-generation phone that received a high level of positive publicity. Despite running several high-speed production assembly lines, the manufacturer is still falling short in meeting demand for the phone nine months after introduction. Which of the following statements is the most plausible explanation for the demand/supply imbalance?
- The phone price is low relative to the equilibrium price.
- Competitors introduced next-generation phones at a similar price.
- Consumer incomes grew faster than the manufacturer anticipated.
Solution
A is correct. The situation described is one of excess demand because, in order for markets to clear at the given level of quantity supplied, the company would need to raise prices.
What’s your doubt exactly.
If a manufacturer made a great new phone, but despite maximum efforts it can’t cover all demand. Rise the price then, you can sell your product more expensive.
Can u tell me what “cant cover demand” is?
I thought when price is relative low, comapny can sell more.
Produce enough quantity of phones to cover the quantity demanded.
You think that in a way like “if the price is low, then it is attractive and people will prefer that product so the company will sell more”. That’s correct in a general sense, but that’s not the correct way of seeing this dilemma in economic terms.
Prices are stated by two forces: supply and demand. By the time there is more demand than supply, prices should rise (Case 1); if demand is lower than supply, prices should go down (Case 2) . If prices don’t adjust accordingly in Case 1, there is scarcity. If prices don’t adjust accordingly in Case 2, there is overproduction and inventory builds in excess.
The question is about Case 1.
Where do you see that phrase?
But not in this question.
Oh, from previous Harrogath’s comment
Can u share your idea abt that question? Im still unclear
Draw a typical demand curve: \
Draw a typical supply curve: /
Where they cross, quantity demanded = quantity supplied, and price = equilibrium price.
Question: In the scenario described in the question, does the quantity supplied exceed the quantity demanded, or does the quantity demanded exceed the quantity supplied?
Quantity demanded is lower than quantity supplied so i reckon that both companied sell at low price?
Please quote the sentence that tells you this.
For this question. Quantity demanded is higher than quantity supplied.
Exactly.
Now, in the picture you drew of the supply and demand curves, draw a horizontal line (constant price) that intersects the demand curve at a higher quantity than the quantity at which it intersects the supply curve.
How does that price compare to the equilibrium price? Higher, or lower?
What if competitor also supplied at similar price (lower price)?
Then they would increase the supply, making it less likely that the demand would exceed the supply.
it means that maybe happened in the past. Therefore, both A and B are correct?