Personal Computers Fall in Price - Essay Example

Topic In recent years, the price of personal computers has continued to fall even in the face of increasing demand. Explain with the aid of a diagramhow this has occurred. There has been an explosive growth in the demand of personal computers in the last decade. The prices of the first personal computers were very high as compared to the computing power they offered. PCs were found in few businesses and fewer homes. It is hard to believe that just 20 years ago students wrote most of their papers in longhand and did most of their calculations by using a simple calculator. But the prices of computing power fell sharply and as a result, more people were enticed to buy their first computers. Gradually, PCs were being used more often at work and in schools. With the development of the internet, yet more people embarked on the computer bandwagon. Worldwide, PC sales totalled about 100 million in 2002 (Samuelson, Nordhaus 2003). In the wake of falling prices, PC industry has experienced a continuous boom. Today, PC has become an indispensable product. This paper will discuss the factors that have had an impact on the price pattern of this indispensable product. To do so, some basic concepts of economics will be introduced. A market is a mechanism through which buys and sellers interact to determine prices and exchange goods and services. Prices direct the decisions of consumers and producers in the market. Higher prices tend to reduce consumer purchases and encourage production. Contrariwise, lower prices encourage consumption and dampen production. Therefore, prices are the balance wheel of the market mechanism (Samuelson, Nordhaus 2003). The following graph justifies this concept: (http://www.tushar-mehta.com/excel/charts/supply_and_demand) It is imperative that an accurate interpretation regarding changes in price and quantity of a particular product is done. This is because the change in quantity as a result of a change in price could be instigated from either the demand side or the supply side (McCain 1981). For example, if fewer airline tickets are sold, it could either mean that the airfares have surged or demand for travel has plummeted. Studying the price behaviour in conjunction with the quantity can sometimes lead to meaningful conclusions. This can be substantiated with a change in the price of bread leading to a change in quantity demanded. Rising price of bread leading to reduced sales suggests a decrease in supply and therefore, a change in the supply curve to the left. On the other hand, rising price of bread leading to a surge in sales indicates that demand has outweighed supply. In relation to demand and supply, it is important to introduce the concept of elasticity. Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price (McCain 1981). If demand is elastic, it means a small change in price will cause a significant change in demand. An inelastic demand, on the other hand, does not reveal the same characteristics. Following is a graphical representation of elasticity of demand: (http://www.sparknotes.com/economics/micro/elasticity/section1.html) Goods that have ready substitutes tend to have more elastic demand than those without any substitutes. Food, for example, is demand-inelastic as there is no substitute for it. So even if the prices do increase, there will be no effect on the quantity consumed. On the other hand, if price of coffee goes up, consumers have substitutes to choose from, like tea or cola and this may cause a drop in demand. Economic history indicates that the total output in the United States has increased tenfold over the last century. Much of this increase in output stems from the technological change which has improved productivity. An example of a technological change is when a firm adjusts its production process to reduce waste and increase output. This is termed as process innovation and it differs from product innovation whereby innovative products are introduced in the marketplace (Russell, Wilkinson 1979). Process innovation allows firms to produce more output with the same inputs or to produce the same output with fewer inputs. In other words, process innovation is equivalent to a shift in the production function (McCain 1981). One of the most important measures of economic performance is productivity. Productivity measures the ratio of total output to a weighted average of inputs (Samuelson, Nordhaus 2003). The main elements that accelerate productivity are technological change as discussed above and economies of scale. Economies of scale condition is achieved when the average cost of producing a good diminishes as each additional good is produced. This is due to the fact that the fixed costs are shared over an increasing number of goods. There is a strong link between production and costs. As mentioned above, if technological improvements allow the firm to produce the same output with fewer inputs, the firm's costs will fall. The prices of inputs determine a firm's cost curve. Inputs like labour and land are important factors that influence the costs of a firm. Costs are of two types; fixed and variable. Fixed costs are incurred by the firm even if no output is produced. For example, fixed cost includes rent for a factory or office space, contractual payments for equipment leased, salaries etc. Variable costs are influenced by the amount of output that is produced such as raw material or fuel (Samuelson, Nordhaus 2003). (http://www.sparknotes.com/economics/micro/demand/section.html) The graph above depicts a downward sloping aggregate demand curve. It means that as the price level drops, the quantity of output demanded increases. This is exactly what is happening in the personal computers industry today. The costs of production have come down due to advances in technology and economies of scale and, as a result, there is an increased output with lesser inputs. Furthermore, since PC is not a necessity, it can be termed as a product with a price-elastic demand. As discussed above, since there is no substitute for it, if the price of PC goes up, there will be a noticeable effect on demand for PCs. When demand is price-elastic, a price decrease increases total revenue. This is another reason to keep PC prices low as it will maintain the competitive position of the firm in the market. If the prices are increased for PCs, total revenue will be affected. The above arguments pose a solution to the mystery of falling prices of personal computers in the face of increasing demand. Technological advancement as well as economies of scale has dampened the costs of production, thereby, reducing the prices of PCs and keeping their demand steady. WORKS CITED McCain, Roger A. Markets, Decisions, and Organizations: Intermediate Microeconomic Theory. New Jersey: Prentice Hall, 1981 Russell, Robert & Maurice Wilkinson. Microeconomics: A Synthesis of Modern and Neoclassical Theory. New York: John Wiley & Sons, 1979. Samuelson, Paul, & William D. Nordhaus. Economics. New York: John Wiley & Sons, 2003 Spark Notes on the Web. Spark Notes: Online Study Guides. 18/12/2006 Tushar Mehta Consulting on the Web. Tushar Mehta. 18/12/2006 Read More