Part 1
Part 2
Exploration
Exploration
Invention
Invention
Application
Application

Application
Activity 

Let's take a closer look at the market for Internet access. Suppose most service providers offer full Internet access for $20.00 per month (flat rate). At this price, many users are unable to connect via their Internet service provider because so many others have demanded the service at the same price. Which of the two graphs below best illustrates this scenario?

If you chose graph B, you are correct. The ISPs are offering service at a price that is too low and the market does not clear. We have a situation in which the quantity demanded of Internet connections is lower than the quantity supplied by the Internet service provider.

Graph A indicates that the market has cleared; that there are the same number of people connecting to the Internet as the service provider can handle. Graph A does not appropriately depict a shortage of connections.


Quiz  

Take this short quiz to evaluate your understanding of supply and demand.

* Source: "Capstone: The Nation's High School Economics Course." New York: National Council on Economic Education. 1989.


Activity 

Suppose that many Internet service providers offer $19.95/month unlimited access and that many of their customers are unable to connect. How would you recommend the shortage of connections be alleviated? Look at the graph below and observe what happens as you make your recommendation.


Internet service providers should take advantage of changes in technology to expand the supply of connections.


Internet service providers should increase the price of Internet access by changing to a base rate + per minute charge.


A campaign should be launched to urge Internet users to get out and exercise instead of spending so much time in front of the computer.


The price should be lowered to encourage more people to get online.

As you can see from the above activity, there is more than one way to move toward a market-clearing price. As in the case of America On-line and many other ISPs, an investment in technology helped move the supply curve outward resulting in a reduction of the shortage of connections.

Now that you have a better understanding of how the market for Internet service can clear, it's time to move on to a lesson on tax incidence. Click here to investigate proposed access charges.