The Factors Determined the Personal Computers Prices - Assignment Example

Introduction A free market is characterized by the application of the forces of demand and supply to determine prices of commodities. Simply put, when the demand for a product increases, the price of the product increases and vice versa. In a free market, the price is fixed at the point where supply meets demand, as shown in the diagram below: In the computer market, there are many players and therefore, there are innumerable products. The computer market is characterized by the advancing technology and constant churning of products to meet customer needs. In this context, when a new variant is launched for an existing product, the value of the existing product falls considerably. Likewise, there are many other determinants of demand for a computer market such as knowledge and price barriers, social influences, lifestyle changes, and competitor and component prices, and so on. The world's second largest personal computer maker, Dell, launched its latest Inspiron 1525 laptop computer that features 15.4-inch HD definition wide aspect display with 720p resolution, a Blue-ray player disc drive and an HDMI port along with the basic features. Dell has been quoted as an example to guide through the learning of the economics of computer pricing. Recent years have seen fall in prices of personal computers even in the face of increasing demand. To study this further, it should be kept in mind that demand and supply control prices in a free market and increase in the supply of a product over demand causes the price of the product to fall. Determinants of price in a free market A free market can be defined as a market where the sellers and the buyers of a product are free to determine the price of the product and this is done by the law of demand and supply. Free markets are in contrast to controlled markets where factors determining prices are influenced by external parties. In a free market, however, the demand and supply for a product determines whether the price of the product increases or decreases. When the demand for a product increases, the price for the same increases as well and this is explained better with the help of a diagram below. Therefore, there is competition among companies to place their products among customers in such a way that the product is competitive and customer interests are pulled to increase demand, thereby increasing prices. Determination of equilibrium price and quantity The determination of price depends on the type of market organization the product belongs to. In a competitive market, the point of intersection of market demand and supply curves determines the price that will prevail in the market. As in other competitive markets, the forces of demand and supply determine computer prices. In the diagram, P* is the point of intersection of the demand and supply curves and is called the equilibrium price. "The word 'equilibrium' denotes a state of rest from which there is no tendency to change" (Maddala and Miller, 2004). Price equilibrium occurs where the price that the buyers wish to buy matches the price that the sellers wish to sell at. The point C in the diagram describes a position of equilibrium in the market. When prices are above or below P*, i.e., P1 or P2, the market is said to be in disequilibrium. As can be seen from the diagram, supporting the price above P* creates an excess supply, whereas, fixing the price below that causes excess demand. Therefore, an excess demand would lead to an increase in prices whereas excess supply would lead to decrease in prices. When the demand for computers is high and there is shortage of supply of the same, then the balance of power shifts towards the seller. This is because of the excess demand in the market for good commodities. Conversely when demand both for computers and complimenting products is weak and when there is excess supply of the same available on the market, then the power switches to potential buyers. This is because there is a wide choice of products available and the buyers can afford to negotiate prices with the sellers. If demand rises due to changing factors that shift the demand curve to the right, then the equilibrium price in the market will increase. Similarly if the supply of computers were to fall suddenly then the equilibrium price would rise as the supply curve shifted to the left. From the above diagrams, it is understood that in a free market, for the price of a product to increase, the demand for the product should increase as well. For the price of computers to increase, demand for them should exceed supply. Product differentiation The personal computer market is dominated by a number of branded products. There is stiff competition among the players to market their product with a better competitive edge. As demand determines price, the companies are dedicated towards increasing prices for their products. In the computer market where both demand and supply are abundant, producers or sellers need to differentiate their product in such a way as to remain competitive and pull the attention of the customer to their product. Product differentiation is used by suppliers to distinguish their own products from those offered by their competitors. Pass & Lowes have identified two main ways of differentiating products in the market: By variations in the physical appearance and attributes of the product, based on differences in designing, styling, coloring and packaging and differences in quality, composition, accessories, innovatory features and performance results; Use of advertising and sales promotion techniques which emphasize the subjective aspects of the product (Pass & Lowes, 1994). Makers of personal computers attain a competitive edge with the aid of both the means stated above. More and more, customers are demanding stylish and unique PC options to fit their lifestyle. Concentration has shifted to aesthetics over speed, power and reliability as all branded PCs are laden with attributes such as comparable disk space, processor speed, and RAM. Therefore, to get something unique, customers are looking to style. In addition to a variety of colors ranging from the traditional black and beige to bolder pink and red, new PCs are designed in a variety of materials, textures, shapes, sizes and form factors. "The PC experience is becoming more about the person and less about the technology" says Nadine Kano, Marketing Director for experience computing, Microsoft. Customers demand style as well as mobility and easy accessibility and therefore, today's computers are accessorized with wireless keyboards, minimal cables, long battery life, wireless networking, entertainment offerings that replace television and music systems and much more (Microsoft website). To quote the example of Dell, we look at the latest launch of its Inspiron 1525 laptop with an added feature, the Blue-ray player disc drive which is fully backwards compatible and plays as well as burns traditional DVDs and CDs. The laptop offers designs like Chill, Blossom and Commotion, in a variety of colors including Midnight Blue, Sunshine Yellow and Ruby Red. The blue-ray drive is the latest fad in personal computers with several makers scrambling to inculcate the feature in their latest launches. Inspiron integrates Broadcom Media PC technology that lets PCs having integrated graphics to play high definition video and also features Dell MediaDirect technology that provides a one touch, whether the system is powered off or in hibernation mode. Determinants of demand Some of the factors that determine the demand for computers are listed below: Knowledge and price - according to Venkatesh & Brown two specific barriers, knowledge and price are relevant in the context of PC adoption in homes. Not possessing the requisite knowledge to operate a computer significantly inhibits adoption of the same. Also important is the price of the computers and the resources in the hands of the consumers to purchase the computers at quoted prices. Lifestyle, tastes and preferences - when computers first entered the market, Ken Olsen, President, Chairman and Founder of Digital Equipment Corporation in 1977 remarked that "There is no reason anyone would want a computer in their home". As technology advanced with internet services and support activities, the luxury of owning a computer turned to a necessity. The demand for the type of computers is dependant on the taste and preference of the consumers. The current trend has been identified as stylish personal computers with easy mobility and personalized features. Social influences and utilitarian outcomes - the status impact from possessing current technology was identified as one of the major factors influencing demand for personal computers. This was followed by applications for fun and entertainment and personal use. Influence of friends and family was also a contributing factor to purchase decisions as far as personal computers was concerned. Rapid change in technology - this is a major factor that drives the computer market. Today's world, where technology is advancing at a fast pace, is characterized by manufacturers constantly churning new products to suit the customer needs. In this context, products become outdated very fast and the demand for such outdated products will be very low. A new version to an existing product brings down the value of the existing product considerably. For example, with its new launch, the prices of Dell's basic models like XPS M1330 and M1530 have been reduced considerably (Topnews.in). Prices of components - prices of the components have a huge impact o the cost of production of computers, thereby influencing the demand for the same. When the prices of components are high, the cost of production will increase and the producers have to lift prices to compensate such a hike. The same applies when prices of components decrease. Prices of competitors - the personal computer market is a highly competitive market with huge brands competing against each other based on product differentiation. In such a competitive market, prices are driven by competition, i.e., when a competitor decreases prices of his product, all manufacturers are bound to do the same to remain competitive. In 2001, the prices of branded PCs fell due to the price cut in the latest Intel chip installed in those computes. To factor this price fall in the chip to their customers, all major brands lowered their prices proportionately. It was determined that better using supply chain management could lead the companies to pass on the benefits of lower prices to their customers much faster (Raghuvanshi, 2001). Income (both actual and anticipated) - the disposable income of consumers is another contributing factor to demand for computers. When the disposable income in the hands of the consumer rises, there are more chances for higher demand for computers. Anticipated income refers to what the consumers are intended to get in the future as far as their income is concerned. When there is a possibility of increase in salaries, customers become more confident and are more likely to demand more and upgrade their lifestyle. Long-run supply for a decreasing cost industry In decreasing cost industries, firms experience lower costs as the industry expands. This theory is applied to the personal computer industry. As demand for personal computers increased, new manufacturers for computers entered the industry and greatly increased the resource demand for the components used to build them (for example, memory chips, hard drives, monitors, and operating software). The expanded production of the components enabled the producers to attain substantial economies of scale. The decreased production costs of the components reduced their prices, which in turn brought down the average cost of production of the computer manufacturers. The supply of personal computers increased by more than the demand for the same, and therefore the price of the personal computers declined (McConnell and Brue, 2005). A decline in the price of computers leads to an expansion in their use and a boost to the level of output. Steady declines in computer prices and steady increase in the use of computers would lead to steady rates of output growth. Therefore, to generate faster rates of output growth, the pace of price decline or the pace of increase in computer use has to pick up (Sichel, 1997). In a bid to double its sales to $1 billion in India, Dell Computers has announced its intention to launch low-cost personal computers in the market (Business Line). Dell also launched a low-cost personal computer in China in 2007 with the aim of capturing the market share from the leaders in the Chinese market, Lenovo. Michael Dell, Dell's Chief Executive Officer, reported their intention of launching similar low-cost products in other emerging markets to gain more customers (Techwhack.com). It is evident from the diagram above (Baye, 1999) that prices fall when the supply curve shifts to the right. According to the law of supply, when supply of a product increases and the demand remains constant, the price of the same decreases. When the price of the components falls, the average cost of production decreases leading to increase in supply over demand. Thus when the supply curve shifts from S to S* and the demand remains constant, price of the PCs fall from P to P*. The law of demand supports that when prices fall, the demand for the same increases. Hence, fall in prices of the personal computers is complimented by increase in demand for the same. Dell, the second largest personal computer maker after HP, is cutting costs to revive the company's earnings. Bloomberg reported that Dell is closing plants and cutting more than 10 percent of its workers in an effort to save $3 billion a year by 2011 in a slumping US market. The company also announced its tactics to tackle the problem of shortage of laptop batteries that the personal computer market is currently experiencing. Owing to the shortage, the prices of separately sold batteries used as replacements or for surplus power had increased. Dell has announced its intention to work with other suppliers and its partners throughout the supply chain to limit any price increases and reduce its impact on their customers. Notebook PCs accounted for 30 percent of revenue in Dell's most recently completed quarter and analysts have attributed this increase to lower prices for components (CIOL). Conclusion As seen with the aid of the diagram, even though the demand for personal computers is on the rise, the price of the product is falling. This is owing to the increasing popularity and demand of the product which has resulted in increased competition among players in the market. As more and more players entered the market, product differentiation became the key to competitiveness. Computer manufacturers kept pace with the changing consumer preferences and tastes, churning new products and better variants to existing products to remain on the top of their profitability curve. With this came increased demand for components and a decrease in their prices. As the component prices decreased, cost of production decreased and supply exceeded demand for the product. This brought down prices and subsequently increased demand further. Thus, even in the face of increasing demand, the price of personal computers continues to fall. References Sichel, Daniel. E. The Computer Revolution: An Economic Perspective. Brookings Institution Press: 1997 Raghuvanshi, Gaurav. Branded PC prices fall below Rs 40,000. September 21, 2001 http://www.rediff.com/money/2001/sep/21pc.htm - viewed on April 5, 2008 Microsoft website. Fashion meets Technology: Welcome to the future of PCs. Washington: Jan 7, 2008 http://www.microsoft.com/presspass/features/2008/jan08/01-07fashionpcs.mspx - viewed on April 5, 2008 Pass, Christopher and Lowes, Bryan. Business and Microeconomics: An Introduction to the market economy. Routledge: 1994. McConnell, Campbell. R and Brue, Stanley. L Microeconomics: Principles, Problems and Policies. McGraw-Hill Professional: 2005 Maddala, G. S and Miller, Ellen. Microeconomics: Theory and Applications, Tata McGraw Hill Companies, New York: 2004 Baye, Michael. R. Managerial Economics and Business Strategy. McGraw-Hill Companies, Inc: 1999 Venkatesh, Viswanath and Brown, Susan. A. A longitudinal investigation of personal computers in homes: Adoption determinants and emerging challenges. August 1998. http://rkcsi.indiana.edu/archive/CSI/WP/wp98-01B.html - viewed on April 5, 2008 CIOL, Philipp Gollner. Dell, HP confronting laptop battery shortage: March 26, 2008. http://www.ciol.com/EC/Feature/Dell,-HP-confronting-laptop-battery-shortage/26308104711/0/ - viewed on April 7, 2008. Bloomberg, Will McSheehy. Dell Getting Offers for Consumer-Lending Business, CEO Says: April 6, 2008. http://www.bloomberg.com/apps/newspid=20601103&sid=aqXqpK_dvYAs&refer=us - viewed on April 7, 2008. Techwhack.com: March 21, 2007. http://news.techwhack.com/5461-dell-china-2 - viewed on April 7, 2008. The Hindu Business Line: March 21, 2007. http://www.thehindubusinessline.com/2007/03/21/stories/2007032106140100.htm - viewed on April 7, 2008. Topnews.in, Darpana Kutty: April 2, 2008. http://www.topnews.in/dell-unveils-inspiron-1525-laptop-blu-ray-players-cuts-xps-prices-229546 - viewed on April 7, 2008. Read More