2. Consider the market for DVD movie rentals, which is perfectly competitive. Th

Question

2. Consider the market for DVD movie rentals, which is perfectly competitive. The market supply curve slopes upward, the market demand curve sloped downward, and the equilibrium rental price equals $3.50. Consider each of the following events, and discuss the effects they will have on the market clearing price and the demand curve faced by the individual rental store.

a. People’s tastes change in favor of going to see more movies at cinemas with their friends and family members.
b. National DVD-rental chains open a number of new stores in this market.
c. There is a significant increase in the price of downloading movies on the Internet.

Explanation / Answer

When people's taste change in favor of going to see more movies at cinemas with their friends and family members, we see that this will affect the DVD movie rentals business negatively as less people will want to watch DVDs. (They will in fact go to the cinemas.) Thus, this means the demand will decrease and will be represented by a leftward shift of the demand curve. This causes the equilibrium price of rentals to drop and equilibrium quantity to drop as well. Opening new stores mean there is more supplies of DVDs. This causes the supply curve to shift to the right. However, the question doesn't ask about what will happen to the supply curve. So I assume you can just say the demand curve doesn't move, although the intersection of the supply and demand (which determines the equilibrium price and quantity) will move. Thus, a rightward shift of the supply curve will cause the equilibrium price to go down and the equilibrium quantity to go up. Perhaps you can say nothing happens to the demand curve except the point of intersection with the supply curve. If prices increase to download movies on the internet, people will switch to something more affordable such as renting DVDs. Thus, the demand curve will shift right (increased demand). This means that the equilibrium price will increase for DVDs and the equilibrium quantity will also increase.

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