Question

A principle purpose of the market model is to show how equilibrium price and quantity will change as a result of some 'exogenous shock'--for instance, an increase in demand causes equilibrium price and quantity to increase. Can you think of a real-world example of such a shock to which you could apply the market model to explain changes in price and quantity? Explain what it means for markets to allocate resources efficiently. Is this sort of efficiency desirable? Why or why not? Are there other desirable social outcomes, and, if so, could they conflict with an allocatively efficient outcome?

Answer 1

Answer:

This is a relatively old example, but it illustrates this principle quite well since it meant an extreme exogenous shock caused by a huge cost reduction.

During the 1970s, computers were huge and extremely expensive, until a guy named Steve Jobs showed up and developed the first PC (personal computer). Until then only large companies could afford using computers and their use was really limited to certain specific tasks.

But once the PCs were available, the computer market shifted completely. Instead of costing millions of dollars, the Apple 1 costed exactly $666.66.  That was a radical shift in prices, and increasing the quantity demanded of PCs by millions. A few years later PCs could be found at most households and schools.

That changed the world completely since the resources that once were allocated to producing very big and extremely expensive PCs shifted to producing smaller and affordable units. That allocation efficiency benefited society as a whole, changing the whole world. Pcs also helped to increase productivity in a lot of different areas and created new sub segments like smartphones, tablets, etc.

Of course that not all the consequences were good for everybody, for example IBM was the largest computer and PC manufacturer back then, now it doesn't even manufacture PCs.