Why the price of computers keep falling despite increasing demand

Introduction

Now a day, computers are the main source of connectivity among people. The major share of work i.e., college assignments, teaching lessons, work presentations are mostly dependent on the computers. And also doing a long distant chat for almost free, computer or information technology has enabled human being in coming out with the speedy solutions of almost everything. (http://en.wikipedia.org/wiki/Personal_computer)

A personal computer (PC) be can any general-purpose computer whose size, capabilities, and original sales price make it useful for individuals, and which is intended to be operated directly by an end user, with no intervening computer operator.

Personal computers Software applications include word processing, spreadsheets, databases, Web browsers and e-mail clients, games, and myriad personal productivity and special-purpose software. Modern personal computers often have high-speed or dial-up connections to the Internet, allowing access to the World Wide Web and a wide range of other resources.

In the free market condition the price of a product will be determined by the demand and the market supply of computers. In a market, Supply and demand is an economic model of price determination. It concludes that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity.

If we look at computer market, the demand is keep on increasing and also at the same time the market supply also increasing. According to the law of demand and supply, when the demand is increased, the price goes up the free market. But in this particular computer market, demand is growing but, the price comes down gradually. That is the question of this assignment and, in this piece of work I am going to discuss the best possible reasons to that behavior. http://www.channelweb.co.uk/crn/news/2258012/uk-business-pc-market-decline

In this assignment it will be discussed and analyzed the following topics.

Explanation for why the price of personal computers has continued to fall even in the face of increasing demand.

Conclusion

Background – Computer Market

The UK personal computer market in 2008 was worth 12.81bn at end-user prices, an increase of 4.2% over 2007 and its highest level of output since 2000. However, it led to a fall of 8.2% in sales to 11.77bn during the recession in 2009.

During the period from 2005 to 2008 personal computers (PCs) reported a higher annual growth, whereas peripherals and add-ons declined in total value sales. Therefore it was led to a negative growth of 3.3% over the period.

In the consumer market, the better performance of PCs over the period, particularly, is attributed to sales of portables and particularly net books in the past year. Mobile computing is continuing to drive net book sales. Desktop computers have become less attractive and are in decline with more portables now being sold than desktops.

Manufactures are expecting a rebound in sales in 2010 and full recovery by 2011 with positive.

The principal analyst Ranjit Atwal at Gartner says “The UK market for computers showed growth in Q4 for the first time this year. According to him, 70 per cent of the total PC market in the UK has also become heavily dependent on mobile PCs.

The percentage of the UK market share

Acer held on to the top spot in the UK with 19.1 per cent market share, HP held the second with 18.9 per cent. Dell was the third with 16.5 per cent, followed by Toshiba and Samsung with 10.4 per cent and 6.5 per cent respectively.

He added that the total UK market [in terms of shipments] in Q4 was 3.8 million units. Even in the Western Europe Acer held 23.1 per cent of the market. HP was second again with 21.3 per cent, Dell was third with 9.9 per cent and Asus and Toshiba took fourth and fifth place with eight per cent and 6.2 per cent market share respectively.

There is a significant growth’ in vendors such as Apple, Samsung, Lenovo and Sony also ‘ putting ‘significant’ pressure on the top five vendors in Western Europe. Research has found that the UK computer market continued to struggle in 2009’s closing quarter as western European counterparts return to growth.

Market watcher IDC preliminary figures reveal that UK personal computer shipments in Q4 fell 1.7 per cent annually to 3.8 million. Notebook shipments were up 2.3 percent year on year to 2.9 million, while the desktop market slumped 12.8 per cent, with 878,000 units shipped.

The emerging markets were collapsed when the crisis came, but now they are back to double digit growth.

Likewise we observed that the market for the computers is expanding day by day in millions, but the cost of the computers are coming down gradually which is contrarily to the theory of the Demand and Supply. Therefore we are required to examine in deapth that, what are the triggers for such situation in real terms.

http://www.mynewsdesk.com/uk/view/pressrelease/research-and-markets-computer-

Explanation for why the price of personal computers has continued to fall even in the face of increasing demand.

In this particular computer market, we understand that the price of personal computers has continued to fall even in the face of increasingly high demand, which is contrary to the law of demand and supply. That happens mainly because of the competition and increasing efficiency few more other reasons.

In this case, Price remains constant or reducing and change in any other determinants causes demand or supply to rise. That results shifts in the demand of supply curves to the right or to left depending on the circumstances. Any other factors can be,

Demand side –

The price of the other product. ie. Substitutes and complements.

Income

Population

Preferences

Future price expectations

Supply side –

The price of other product, ie. Price of substitutes and complements

The price of factors of production used to produce the computer. (land, labor, capital)

Advancements of technologies.

No of producers or size of the market.

Future expectations.

Now we will look at the demand side of the computer market.

In the computer market there is a huge growth in demand day by day mostly due to the following reasons..

Price of the other product

Substitutes: In today’s world, there are no closer substitutes to the computer. People are using high tech mobile phones to do most of their computer related work for example sending and receiving e mails. Still it is not a closer substitute. Therefore the demand is increase and the demand curve is shifted to the right, increasing the price. Please see the diagram below.

Complements: price of the complements also becoming lower when compared to the past few decades. In general, a company’s strategic interest is going to be to get the price of their complements as low as possible. The lowest sustainable price would be the “commodity price” the price that arises when you have a bunch of competitors offering indistinguishable goods. So: The smart companies try to reduce its complements price in order to capture the market.

Ex. When IBM designed the PC architecture, they used off-the-shelf parts instead of custom parts, and they carefully documented the interfaces between the parts in the IBM-PC Technical Reference Manual. As long as you match the interface, you can be used in PCs. Within a short time large number of companies started up offering memory cards, hard drives, graphics cards, printers, etc. Cheap add-ins meant more demand for PCs. Please refer the diagram below.

Increment in real income

The Income of the consumers has been increased. The effect that income has on the amount of a product that consumers are willing and able to buy depends on the type of good we’re talking about. For most goods, there is a positive (direct) relationship between a consumer’s income and the amount of the good that one is willing and able to buy. Being considering the computer is a normal good, when income rises the demand for the computers will increase.

The higher the level of aggregate and/or personal income, the higher the demand for a typical commodity as a general. Where the income is higher more of a good or service will be chosen at a given price. Thus determinants of demand normally utilize some form of income measure, including Gross Domestic Product (GDP).

If you look at the following statistics the real income of the consumers have heen increased.

Real household disposable income per head1 and gross domestic product per head2

United Kingdom

Index numbers (1971=100)

Gross domestic product

Household Income

1971

100.0

1972

103.7

108.3

1973

111.1

115.1

1974

109.7

114.1

1975

109.0

115.0

1976

111.8

114.3

1977

114.5

111.7

1978

118.2

119.8

1979

121.4

126.7

1980

118.8

128.8

1981

117.3

128.4

1982

119.7

128.3

1983

124.1

131.0

1984

127.4

135.9

1985

132.0

140.7

1986

137.3

146.7

1987

143.5

149.2

1988

150.7

157.5

1989

154.2

165.1

1990

155.4

172.6

1991

153.2

176.0

1992

153.4

180.8

1993

156.8

186.2

1994

163.6

188.8

1995

168.5

193.7

1996

173.4

199.7

1997

179.1

208.1

1998

185.6

212.4

1999

192.0

218.5

2000

199.5

227.7

2001

204.5

237.8

2002

208.7

242.6

2003

214.6

249.9

2004

220.5

251.9

2005

225.1

258.9

2006

231.5

262.7

2007

238.5

262.9

1 Adjusted to real terms using the expenditure deflator for the household sector. See Appendix, Part 5: Household income data sources.

2 Adjusted to real terms using the GDP deflator.

Source: Office for National Statistics; Government Actuary’s Department; General Register Office for Scotland; Northern Ireland Statistics and Research Agency

Therefore, the demand curve for computers has definitely shifted to the right from D1 to D2 reduce to increment in real incomes. Therefore, there has been a rise in their preferences. Please refer the diagram below.

http://www.econport.org/content/handbook/Demand/Factors.htmleal

3.3 Consumer Taste, Fashion, Trend and Preferences

It is a real fact that all markets are shaped by collective and individual tastes fashion trend, and preferences. These patterns are partly implanted by information and knowledge of products and services and partly shaped by culture, including the influence of advertising. Because of these differences in taste and preferences, different societies use forest products differently.

Population

According to the following table, the population of UK has been increased and as a result the aggregate demand for computers have been increased.

Table 1.1

Population1of the United Kingdom

Millions

1971

1981

1991

2001

2007

2011

2021

2031

United Kingdom

55.9

56.4

57.4

59.1

61.0

62.8

67.2

71.1

England

46.4

46.8

47.9

49.5

51.1

52.7

56.8

60.4

Wales

2.7

2.8

2.9

3.0

3.2

3.3

Scotland

5.2

5.1

5.2

5.3

5.4

Northern Ireland

1.5

1.6

1.7

1.8

1.9

2.0

1 Mid-year estimates for 1971 to 2007; 2006-based projections for 2011 to 2031. See Appendix, Part 1: Population estimates and projections.

Source: Office for National Statistics; Government Actuary’s Department; General Register Office for Scotland; Northern Ireland Statistics and Research Agency

When the population is increased the demand is increased, the demand is increasing and demand curve shifts to right increasing the price of the computer from P1 to P2. Please refer the diagram.

Now we will look at the Supply side of the computers.

Reduction of prices of factors in production

Production cost is a main criterion in deciding the product price. If input costs decline, firms respond by increasing output. As a result marginal costs are dramatically reduced and consequently supply is increased. Therefore there has been a huge fall in price and quantities traded have been risen dramatically.

In the long run, when an industry expands the cost of industry also decreases. As the industry produces more output, the minimum average cost of production for each firm decreases with the decrease in costs. (Economies of scale) The decrease in costs may reflect lower input costs which reduce the minimum point of the average total cost curve as the industry grows. As the industry expands and if there are economies of scale in the production of an important input costs may decline.

A decrease in input costs shifts the supply curve to the right from S1 toS2 increasing the Equilibrium quantity from Q1 to Q2. The price will be decreased from P1 to P2. Please refer the above diagram.

http://www.flatworldknowledge.com/pub/1.0/introduction-economic-analysis/29486

Advancement in Technology

Because of the technological advancement, the computers can be produced at a lower cost when compared to the decades ago. As technology has improved, he price of the computers have declined radically lowering their cost of production. Specially advances in communications technology.

http://www.web-books.com/eLibrary/ON/B0/B63/021MB63.html

Let us look at another indicator of the phenomenal change in computers. According to Bureau of Labour Statistics, central processing unit (CPU) speed rose 1,263%, system memory increased 1,500%, hard drive capacity soared by 3,700%, and monitor size went up 13%Between 1993 and 1998.

Therefore the supply curve shift to right from S1 to S2 by reducing the price from P1 to P2.

http://www.web-books.com/eLibrary/ON/B0/B63/021MB63.html

The competitive advantage of high-tech laptops and Notebooks

Notebook PC /Laptops

Various types of notebooks and laptops with different configuration and specifications are manufactured by different companies. The most recognized companies in dealing with laptops are Sony, Vaio, Toshiba, Dell, Fujitsu, Lenovo ect. Priced are depended on configurations. Laptops with general features and lesser configuration are available at cheaper rates and notebooks with higher configuration and extra specifications are bit expensive. The processor may be Intel Dual Core and it may be enabled with widows or vista premium operating system.

From one notebook PC to the other the data speed and the RAM capacity varies depending on the configuration. The memory may range from 1GB to 4GB or higher memory. Some laptops are enabled with TV tuner and built-in cameras for extra usage. The capacity of the hard drive varies, starting from 64GB to 500GB. When compared to the desktops, the hard disk and RAM have smaller sizes. There is a better advantage as the laptop’s Central Processing Unit is produced less heat and also save power. They may be of Intel Core, Core 2 Duo, Premium M, VIA Technologies etc.

http://www.articlesbase.com/laptops

Following are the most attractive features in the Note books and laptops.

LCD display

Key board and a touchpad, equivalent of mouse

Display primarily ranges from 13 inches to 17 inches

Weighs between 1.4 to 5.4 kilograms

Thickness ranges between 18-38 mm

Comes in folding design

Rechargeable batter

Removable memory facility which ensures large storage of data

Availability of many ports for USB connectivity’s

Expandable memory cards such as Mini PCI for a large storage of data.

Portable, cheap priced, stylish, folding design

Both a laptop and notebook have more advantages as they are ultra-portable, durable and they can be used while travelling easily. We can have immediate access and can have our work done instantly and these are always up-to-date, as all files can be saved in a single location. With the help of wireless networks like Wi-Fi and cellular modems, we can access Internet even while on the go.

The above mentioned advancements in technology, the computers gets technically better and better as the months ago for the same price, and this will shift the supply curve to the right.

Retrieved from “http://www.articlesbase.com/laptops-articles/laptop-notebooks-are-best-substitutes-for-our-traditional-computers-745511.html”

This can be seen in the diagram above. The quantity supplied has raised hugely, from Q1 to Q2.The equilibrium price has fallen from P1 to P2, a fairly large relative drop.

3.7 Expansion of the computer market.

Recently more and more computer product chains have been entered to the market and it has led size of the industry grown. When more firms enter a given industry in short, output increases even as the price remains steady. The supply curve is shifted to the right decreasing the price of the product, when industry grows. Following are the main competitors in the UK market.

United Kingdom PC Vendors)

Company

3Q09 Market Share (%)

3Q08 Market Share (%)

Acer

24.2

17.4

Dell Inc.

18.3

20.9

Hewlett-Packard

17.5

19.1

Toshiba

6.5

8.6

Apple Computer

5.0

3.8

Others

28.6

30.2

100.0Total

100.0Note: Data includes desk-based PCs and mobile PCs

Source: Gartner (November 2009)

.

Please refer the diagram.

The rapid increase in the number of firms, together with dramatic technological improvements, led to an increase in supply, shifting the supply curve in diagram to the right from S1 to S2. Price is reduced to P1 to P2.

CONCLUSION

Let us consider the factors those affected to fall in computer price in real terms which resulted both the demand curves and the supply curves led to right shift.

Increased preferences due to advanced technology increase in population and the increment in real income, there is a huge increase in demand. And the demand curve shifted to the right from D1 to D2 in the diagram. The price was increased from P1 to P2.

Suppliers strive for a greater share of the market by having strategies to gain consumer’s demand on their product. This is done so by increasing the value of their product. But there has also been a huge shift to the right in the supply curve for computers than the shift in the demand curve. Please refer the diagram above in relation to supply curve.

In computer market particularly there are simultaneous shifts of both demand and supply curves. Combining both shifts generates an obvious change in quantity, but a questionable change in price. If an increase in demand increases equilibrium quantity and an increase in supply increases equilibrium quantity, then an increase in both MUST increase equilibrium quantity.

In relation to the price, the demand increase (right shifts) results in a higher price, and the supply increase (right shift) leads to a lower price. The price is in determinant and it depends on the relative change of both curves. In the computer market, supply shifts relatively more than demand, therefore the supply induced lower price outweighs the demand-induced higher price, and the price is lower

The price change is in determinant and we have to consider the relative change in the supply and the demand curves. Therefore, the exact reason for the question in this assignment is, even though the demand is increasing, the supply is also increasing but, at a rate higher than the demand increasing rate. You can notice in the diagram above, that the supply curve is shifted to the right at a higher rate than the rate at which the demand curve is shifted to the right. Therefore the price reduces from P1 to P2.

Therefore, I conclude that the rapid increase in the number of firms, together with dramatic technological improvements, led to an increase in supply. The reason for the fall in equilibrium price that is the answer to the assignment question is market supply is relatively more than the demand and it results a lower price.

Reference list

Web sights

http://www.microsoft.com/uk/business/news, 26, March 2010, 8.15 a.m.

http://en.wikipedia.org/wiki/Personal_computer, 26, March 2010, 8.25 a.m.

http://www.channelweb.co.uk/crn/news, 26, March 2010, 9.00 a.m.

http://www.econport.org, 26, March 2010, 9.10 a.m.

http://www.econport.org, 26, March 2010, 9.40 a.m.

http://www.amosweb.com, 26, March 2010, 9.55 a.m.

http://www.slideshare.net, 26, March 2010, 1.10 p.m.

http://www.flatworldknowledge.com, 26, March 2010, 1.25 p.m.

http://www.web-books.com, 27, March 2010, 9.20 a.m.

http://www.articlesbase.com, 27, March 2010, 9.30 a.m.

http://en.wikipedia.org26, 27March 2010, 11. a.m.

htpp://www.microsoft.com/uk/business/news/driving-revenue/UK-PC-sales, 27March 2010, 11. a.m.

http://news.bbc.co.uk/1/hi/business/4704927.stm

Books

Parkin, M. 2008 (8th edition)

Solman, J. 2007 (2nd edition),Economics, Pages 48-65

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