The graph below shows the demand and supply for E-books for various prices.
As can be seen in the graph, as the price for the product increases, the demand decreases. At the same time the supply increases. These are the laws of supply and demand. The equilibrium price and quantity for the market is the point at which the demand and supply curves intersect, i.e. the demand is equal to the supply. This price is $10 and the quantity is 8,000 units (Investopedia).
When the government imposes a price floor of $12 in the E-book market, the quantity demanded will be 7,000 units, whereas the quantity supplied in the market will rise to 8,500 units. This would create a situation of a surplus of 1,500 units in the market. In order to protect the market, either the government can buy the surplus. Else the surplus would go waste and the suppliers will be at a loss (Eonor.com).
When a price floor of $6 is imposed in the market, the quantity demanded rises to 12,000 units whereas the quantity supplied will fall to 6,000 units. So there will be a shortage of 6,000 units in the market. This may result in black marketing and hoarding of the product (Eonor.com).
When the price of E-reader gets reduced by fifty percent, it will have a positive effect on the demand for E-books too. As the E-reader is used along with E-books, it is a supplementary product. When the price of supplementary goods gets reduced, it increases the demand for the other goods as well. The reconstructed graph is shown below with the assumption that the cross elasticity is equal to 0.5, i.e. a 50% reduction in price of E-reader results in 25% increase in demand of E-books (Chand).
References
Investopedia. Law Of Supply And Demand. Investopedia. Retrieved from http://www.investopedia.com/terms/l/law-of-supply-demand.asp.
Eonor.com. Price Floors. Eonor.com. Retrieved from http://economics.fundamentalfinance.com/micro_price-floor.php.
Eonor.com. Price Ceilings. Eonor.com. Retrieved from http://economics.fundamentalfinance.com/price-ceiling.php.
Chand, S. Effect of Demand Curve on Substitute Goods and Complementary Goods. YourArticleLibrary. Retrieved from http://www.yourarticlelibrary.com/economics/effect-of-demand-curve-on-substitute-goods-and-complementary-goods-micro-economics/8914/.
