South-Western College Publishing - Economics  
Cell Phones Sell Well
Subject Comparative Statics
Topic Supply and Demand/Equilibrium
Key Words Consumers, Price, Quality, Cost
News Story

There is a trend toward consumers disconnecting their home phones in favor of using their cell phones. In 1998, the number was tiny, but in 1999 two percent of cell phone users have no home phone. One company says that, of its new customers, 9 percent have no phone at home, up from 4 percent last year. Among those retaining a phone at home, about 12 percent of calls have shifted to cell phones. The 72 million wireless users in 1999 are expected to double in the next 4 years. By the year 2004, usage is predicted to be 554 billion minutes, up from 105 billion minutes in 1998.

The reasons are price and quality. The cost of cell phone usage is falling by about 30 percent a year. The price of using a cell phone is now similar to that of a home phone if voicemail and caller ID are included. Nowadays, the handsets are smaller and lighter. The coverage areas are wider. Batteries last longer. Computers can be plugged into some phones. Many customers find it easier to have a number that travels with them all the time, rather than several numbers, some of which are fixed in location.

(Updated October 1, 1999)

Questions
1. a)Has supply or demand been affected?
  b)Which determinant of supply or demand has changed?
  c)Draw a price-quantity diagram of the market for cell phone usage. Show the supply and demand curves. Mark the equilibrium price and quantity. Show what has happened to the equilibrium usage of cell phones as a result of the change in technology.
  d) Has there been a change in supply or demand? Has there been a change in the quantity supplied or demanded? Explain.
2. The price of cell phone usage has decreased.
  a)Draw another diagram of the market for cell phone usage. Show the initial equilibrium price and quantity.
  b)Why might that have happened, other than a change in technology, to cause the price to fall?
  c)Draw the effect of your hypotheses in (b) on your diagram.
3. The news story also shows that consumers have developed preferences for cell phones over home phones.
  a)In a further diagram of the market for cell phone usage, show the implications for the equilibrium price and usage of cell phones.
  b)In what way would this change a trend in the news story?
Source Steve Rosenbush, "More using cell instead of home phones," USA Today, July 28, 1999.

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