Managerial Economics Resit Assignment - Essay Example

MANAGERIAL ECONOMICS ………………………….. College ……………………………… ……………….. Words count: 1357 Introduction From both economic andmarketing perspectives, products and services offered by different firms offer certain benefits, utility and value that, in turn, represent the want-satisfying power of the goods or services (Kurtz and Boone, 2006, p. 381). Therefore, price of a commodity is what the customers are willing to pay for it in order to acquire the value and benefits that the commodity can serve to them.

If the price of a commodity is not worth its utility, customers are very likely not to buy it. However, in a free market economy, price is highly influenced by the market forces of demand and supply and the utility or the value customers are expecting from a commodity is also influenced by these market forces. This paper addresses factors that determine the price of computers in a free market and explain why computer price has continued to fall even while the demand constantly increased. Price determinants of computer in free market Free market is a market system with few government restrictions on how a product or service can be produced and marketed or on how a factor of production can be employed (Kates, 2011).

Government in all other market systems do intervene in matters regarding how a good or service can be produced and marketed and how factors of production such as land, labor, capital and organization can be employed more than in the case of free market. As there are relatively few government restrictions in countries like United States and Canada, their economies are said to be closer to free-market economy. In a free market economy, price is determined by the market forces of demand and supply.

Consumers are willing to pay for a goods or service only if they are worth the price. Similarly, suppliers are ready to produce and market only if consumers are ready to pay for them. Market equilibrium occurs when market demand and supply are equal and this is how the price of a commodity is determined. Thus, value or utility of the commodity and willingness to pay are significant factors that determine the demand and supply forces in the market. In a free market mechanism, price is never affected by outside forces such as government restrictions.

The resources are allocated by the spending decisions of millions of consumers and producers. As governments place no or relatively very less restrictions on what can be bought and sold, owners of factors of production and producers of goods and services have fuller right to buy and sell whatever they own through the market system. When it comes to computers in a free-market, the price is determined according to the demand and supply forces. As depicted in the table and graph below, price of computers in a free market is determined in the equilibrium point where the demand for computers and its supply intersect.

When price of the computers areas lower as 10,000 or 15,000, the demand may increase to 60 and 50 respectively and the supply will reduce to 20 and 30 respectively. As the table shows, there is only one price of shifts ($ 20,000) where the market is in equilibrium. Quantity demanded is equal to quantity supplied at 40, 000 computers. At all other states, the market price is in disequilibrium wherein supply of computers and demand for computers are in a state of imbalance. Disequilibrium occurs either when the demand exceeds supply or the supply exceeds the demand for computers.

Price per computer $ Demand (000 computers) Supply (000 computers) Market position Effects on price 10,000 60 20 Shortage Rise 15,000 50 30 Shortage Rise 20,000 40 40 Equilibrium Stable 25,000 30 50 Surplus Fall 30,000 20 60 Surplus Fall 35,000 10 70 Surplus Fall As far as computers in free-market mechanism is considered, government will not intervene in resource allocation. In other economic systems, governments may choose to interfere in the price mechanism mainly because they want to control, manage and change the allocation of resources that are very limited.

As far as computers are concerned, technology is one of the major resources and it is being updated almost every day. Government doesn’t need to restrict the technology since it brings further economic well being. Generally, government interferes in the price mechanism to influence the allocation of scare resources, correct market failure, maintain equitable distribution of wealth and income and enhance improved performance of the economy. However, in the case of computers, government doesn’t need to interfere its production, distribution and marketing as there are no such direct issues that government should influence.

Why computers’ price decrease even while demand for them increase? According to the economic theory, in long run, when demand for a particular commodity increases, price for the same should rise (Arnold, 2010, p. 209). However, the price of computer is found to have always decreased despite the steady increase in its demand. It was priced high in its introduction stage. Once it has been introduced and further technology advance has been brought to it, the price for computers started decreasing.

It is because, as and when the demand for computers began increasing, more and more firms entered the market and thus supply steadily increased. When more firms entered computer industry to better grab the slice of growing marketing opportunity, the quantity of computers went up. As more and more computer components are made, the cost of manufacturing went down. Moreover, the R&D costs were spread across greater quantities of products. Rise in the quantity supplied was one of the main reasons why computers’ price was going down despite growing demand.

As Carbaugh (2010,p. 61) explained, computers in the market show elastic demand and this must be a reason why computers’ price is getting decreased even when the demand increases. When a company reduces computer price by 10, the quantity demanded for computers, since it is a technology product, will increase by 20 percent. A small change in the technology product largely affects the demand for the same. As the percentage increase in the quantity demanded is higher than the percentage decrease in price, the total revenues of a firm will increase even when they cut the price.

Revenue increase, in turn, causes increase in the supply which inversely affects the price too. Computer industry is considered as ‘decreasing cost industry’ and this seems to be an effective explanation for why computer prices decrease despite the increase in quantity demanded. Wessels (1997, p. 130) is of the opinion that personal computer industry is an example of decreasing cost industry. In decreasing-cost industry, firms are facing lower costs when the industry expands. As demand for the personal computers increased, new firms entered the industry and largely affected the industry to increase the demand for resources that are components used for manufacturing computers.

When the components’ production expanded, producers of those items have achieved substantial economies of scale. As production costs of the components decreased, their prices too reduced, which in turn greatly lowered the average cost of the production of computers. The quantity supplied of the personal computers thus increased by more than the demand and therefore the price of personal computers steadily declined. As Arnold (2008, p. 483) described, in a decreasing-cost industry, an increase in demand will result in a new equilibrium price being lower than the original equilibrium price.

Conclusion This piece of paper has illustrated underlying principles of economics to explain how the price of a commodity is determined in a free-market. Free-market is a market mechanism in which the price is determined purely by the market forces of demand and supply. Free-market is free from any government intervention or restriction on price, demand and supply factors. This paper found that computers’ price is getting down despite the steady growth in demand for the same because of that 1) computer’s supply has always been increasing due to the market opportunity that firms seized, 2) computer’s demand is of elastic demand and 3) computer industry is an example of ‘decreasing-cost industry’.

References Arnold, R.A, 2008, Economics, Ninth edition, Cengage Learning Arnold, R.A, 2010, Microeconomics, Tenth edition, Cengage Learning Carbaugh, R.J, 2010, Contemporary Economics: An Applications Approach, Sixth edition, M.E Sharpe Kates, S, 2011, Free Market Economics: An Introduction for the General Reader, Edward Elgar Publishing Kurtz, D.L and Boone, L.E, 2006, Contemporary Business, Twelfth edition, Cengage Learning Wessels, W.J, 1997, Microeconomics the Easy Way, Barrons Educational Series