The Cost of Computers Over 10 Years - Essay Example

? The Cost of Computers Over 10 Years The Cost of Computers Over 10 Years Introduction It seems like only yesterday thatthe decision to purchase a computer or laptop was on par with purchasing a secondhand car by today's standards. It was a commitment that required you to use a substantial amount of your savings. Yet today, it is as common for an adolescent to own a laptop as it is for a successful businessman. Why is it that, over the decades, the prices of cars and houses have remained relatively consistent when taking into account historic inflation, yet the cost of a computer has fallen dramatically? This paper will serve to analyze the reasons and economic principles behind this. Computers: Then and Now One does not need qualifications to know that computers were not always so readily available. They were designed with a specific purpose and function: that of the advancement of science, math, and perhaps most fundamentally, for military use. It was only in the late 70's and 80's that computers began to adapt more to business and personal use. With this increased demand for computers, came thriving businesses, many of which are still successful today. Yet even 10 years ago, the computer market was a very different scene than it is today. Laptops were still considered optional 'luxuries', dial-up Internet was common, and mobile computing on phones and tablets was futuristic. In a world that is now completely reliant on computing of all forms, it certainly is interesting to observe how economics has played into the construction of this environment. Supply, demand, elasticity, markets, distribution, pricing, and economic growth have all played their role in one way or another. Moore's Law and Metcalfe's Law It may come as a surprise that the exponential growth of the purchase and use of the computer is of no surprise to some. There are two famous laws that have not only accurately predicted the success of the computer, but also explained the reasoning behind it. The first such law is Moore's Law. Gordon Moore, the co-founder of Intel, simply stated, in 1965, that the number of transistors on integrated circuits had doubled every 12 to 18 months since the microchip was invented and would continue to do so in the future. (Moore, 1965). Simply put, computers have been getting exponentially more powerful since their invention. How is this important to an economic analysis of computer costs? For many years this has been a simple formula for predicting the future cost and efficiency of computers. If we compare the specifications of a computer to what consumers require in order to complete tasks, run software, surf the Internet, and much more, we can see that the advancement of integrated circuits is much faster than the requirement of users. For example, if a student required a computer 10 years ago research, write papers, surf the internet, and communicate, a standard pc of that era would be perfectly suitable. The same student today would require a computer able to perform very similar tasks to the computer of 10 years ago, ignoring the need for graphical gaming and media. Therefore, a computer with the same specifications today and one 10 years ago, or even 1 year ago, can be created with less transistors, meaning the cost of production is less too. The second law that applies to our analysis is Metcalfe's Law. Robert Metcalfe, the inventor of Ethernet, stated that the value of a network is proportional to the square of the number of connected users of that particular system. (Metcalfe, 1993). Originally talking about telecommunications networks, this law can be applied in general to the Internet – a huge, if not the biggest, driving force of the computer. Simply put, it means that every one new user added to a particular network adds more value to that network. A common example of this is the fax machine comparison. “The first person to buy a fax machine was a fool.” (Metcalfe, 1993) A user would find it quite pointless to send themselves a fax and having no recipient, the machine would render itself useless. Yet as more users enter into the equation, the more value the fax machine has. With 1000 users owning a fax machine, the value of the fax machine has increased by n to the squared, with n representing the units in a network. This same law can be applied to computers. While valuable scientifically, in the 70's, computers did not have the network of consumers, and were therefore not considered to be of high value financially. Yet, as more users purchased computers and the network of users expanded, the value of the machine also increased. By observing this law, manufacture of computers not only have initiative to be able to viably create cheaper computers due to cheaper technology and manufacturing means, but also because economically speaking, the law of demand states that buyers will purchase more of a product as its price drops. (Griffin and Ebert, 2006, pg. 15). By causing buyers to purchase more of the product, the network of computers is expanding, which according to Metcalfe and historical analysis of the computing market, creates more value. It could perhaps be considered a circle of economic growth. Elasticity The more we depend on computers, the more viable the question becomes: are they elastic or inelastic? If something is elastic, a change in price will yield a relatively large change in quantity demanded. As a rule of the thumb, it is usually something that is not a necessity but rather a luxury. If the price rises, you can easily give it up, either because it is not necessary or there are substitutes. This certainly can be argued for the computer. Not many people could justify purchasing a laptop 10 years ago for over $2000. It was an elastic product, considered unnecessary, and at that time, a cheaper desktop pc would suffice just fine. However, through the years, we can see computers becoming more and more inelastic. With millions of businesses and individuals depending on computers for their livelihood, it might not be absurd to presume that computers have become an inelastic product. We are certainly aware that if fuel or medicine were to increase in price, the quality demanded could remain relatively stable. It is then perhaps becoming a reality that as computers are becoming more intertwined in daily life, so their value also increases. However, economically speaking, goods and services that exist in monopolistic market structures always have elastic demand against price. Yet goods and services in an oligopoly market structure always have inelastic demand against price. Considering that the oligopoly firms are very large and compete directly with other oligopoly firms, their product and strategy will be almost the same. Eventually they will end up in price wars with similar products. Monopolistic firms, on the other hand, can easily differentiate their product, ranging from packaging, coloring, and advertising. The goods and services in a monopolistic market are much more diversified – one only needs to walk into an electronics store and observe the wide range of computers for sale. Due to this wide range of substitution, the computer market could certainly be considered elastic, as it not only is considered to be a luxury item, but it thrives in a market of hundreds of alternatives. Supply and Demand Furthermore, in order to determine the economical factors that have affected computers, we need to look at supply and demand. There are three factors I want to look at when discussing how supply and demand have changed the computer landscape: supply of computers, consumer demand, and supply and demand for alternatives. As mentioned previously, supply for computers has and is increasing, or shifting outwards, due to the reduction in variable costs associated with the production of computers. As computing becomes more of a necessity within every household, let alone with an individual, then supply shall increase. Supply reflects decisions on which products are feasible to produce, and which are not. In this way, technology is not immune to the law of supply. The law of supply states that producers will often offer more of a product for sale as its price rises and less as its price drops. (Parkin, 2005, pg 64). One might ponder as to why the price of computer then is decreasing as demand is increasing? Surely this is in stark contrast to what the law of supply states? To answer these questions we cannot compare the price of a computer today to that of a computer 10 years ago. We need to compare the price to the relative cost of manufacturing. Taking into account the dramatic drop in the cost of producing a computer today, the increased demand for the product, and the difference between the marginal cost and the price relative to each year, we can clearly see the law of supply in effect here. The law of demand comes into play in a more general sense here. Although we certainly can attribute the demand of buyers for particular computer brands or the decision to purchase a computer at a certain price point – the law actually explains why computers have become more accessible and popular over the last 10 years. Looking back at the cost of a home computer or laptop in 2003, one wonders how we could ever afford it. Because of the high price of the good, the demand remained low, and the quantity also remained low – by today's standards. Yet as the technology allowed for the cost to fall, the demand for computers increased. For the last several years, laptops and personal computers have been very affordable and accessible to buyers. This increase of demand has created an increase of production – keeping in par with the law of demand. The last factor regarding supply and demand is the substitution effect and alternative effect. Although each good is unique, it has substitutes – there are always other goods that can be used in place of it. Twenty years ago, it was very common to write one's letters manually and type script on a typewriter. Ten years ago, the computer was certainly very popular, although many alternatives were considered over owning a personal computer. Typewriters were still in use, Internet cafes were popular, and sharing computers was considered quite acceptable. Today, we can observe that the demand for typewriters has decreased, as it is an inferior substitute. Furthermore, the supply of typewriters is also reduced, as it is comparatively more expensive to produce than computers. In the same way, personal computers are affordable, resulting in a reduction in Internet cafes and computer sharing. Cost plays a vital role in determining which products a buyer will substitute in order to maintain viability. Markets and Distribution It's not uncommon to travel to a fairly undeveloped country and observe the effects of globalization. Although the Internet and computer boom began mostly in developed countries, a second boom followed and continues to follow in developing nations. The markets of countries such as China and India are growing rapidly, and the demand for computing goods, especially in the early 00's was extremely high. We can see, if the graph on the following page, that from the year 2003 to 2008, right before the credit crisis began, the rate of computer sales grew rapidly. The ability of companies to more effectively distribute products to previously untapped markets can be attributed to the rise in computer sales, and a contributing factor to the decline in the cost of the computer, as the law of supply and demand states. By continuing to observe a balance between more effective market distribution, more effective technology, more cost effective manufacturing processes, and increased demand, we can continue to expect a drop in the price of the computer. Conclusion In conclusion, we can observe the many forces that have attributed to the success of the personal computer and laptop. We can perhaps look to our formula, laws, and economic models to predict the cost of the computer, or technological equivalent, in the future. Although, if in this short span of time computers have become such a ubiquitous part of our daily lives, we can only wonder as to the extent of influence it will have on us in the next 10 years. References Amadeo, K. (n.d.). Elastic demand – What is elastic demand. US Economy News Articles and Statistics. Retrieved July 18, 2013 from http://useconomy.about.com/od/glossary/ Elastic-demand.htm Griffin, R. W., & Ebert, R. J. (1991).Business (8th ed.). Englewood Cliffs, N.J.: Prentice Hall. Limoncelli, T. (2013, February 18). Matcalfe’s law: Everything sysadmin. Eveything Sysadmin. Retrieved July 18, 2013 from http:everythingsysadmin.com Parkin, M. (2005). Economics. Reading, Mass.: Addison-Wesley Pub. Co. Pettinger, T. (2013, March 4) Examples of elasticity. Economics Help: Helping to Simplify Economics. Retrieved July 18,2013 from http://www.economicshelp.org Workman, R. (2013, March 22). What is moore’s law? TechNewsDaily.com. Retrieved July 18, 2013 from http://www.technewsdaily.com/17450-moores-law.html Read More