Price Elasticity of the CD Industry - Case Study Example

Given the significance of the raw materials, therefore, no CD company can possibly compromise on them just in order to bring their prices down. Cheaper parts, most know, may bring down prices but ultimately prove a nightmare for consumers. Software corruption and malfunction can result in a simple cut down on the budget. Since most CD companies are reluctant to take such risk and thereby ruin their reputation amongst buyers they (usually) stick to being safe than sorry and thereby choose to use the more expensive parts if they have to.

(Lamb, 2004)Given how dependant the CD industry is on both the supply of building materials as well as the demand of the consumers we find that the price elasticity of both demand and supply is rather high on the CD industry. All private markets generate what are called 'externalities' or 'spillovers'. Such externalities include any sort of charge or benefit that the price of the merchandise or services sold by the market does not include. When we talk about a positive externality we essentially refer to all the extra or excess benefits yielded by certain activities of the producer that he/she was ultimately unable to put to full use.

Now, like in every other industry as big as itself, the automotive industry produces a large number of positive externalities. A good example of such externalities would be a large amount of research and development done by a number of such companies. Such research and development are of course important and beneficial but they are often left unutilized by the company in the long run. As a result, most producers tend to be disinclined to invest in such activities unless of course, the government is providing a subsidy or special protection especially for it.

Unlike positive externalities for which producers end up spending more than what actually benefits them negative externalities refer to excess for which the producers cannot be charged. Also, negative externalities such as these do not feature anywhere in the calculations made by the producers who wash their hands clean as soon as they release the product into the market. The negative externality, therefore, oozes out into the society unaccounted for and completely unwanted. (Dollard, 2006)