Interactions of The Laws of Demand and Supply in the Personal Computer Market - Essay Example

? Managerial Economics Contents Introduction 3 Objectives 4 Analysis 4 Illustration 7 Conclusion 10 Reference 11 Bibliography 12 Introduction Free market economy is an economy where the market is not regulated by government policies for setting of prices of products. The distribution and cost of goods in a free market are based solely upon the demand and supply of the products. Demand for the product would be reflected from the price that the consumers would bid. Higher demand for computers would be reflected from the higher range of prices bid by the customers. This high level of demand would be responded by the money put in by the suppliers. Higher investment of the suppliers would lead to lead to increase in supplies of the computer. When the supply is matched with the demand, it will lead to monetary transaction of computers between the buyer and the seller (Madura, 2007, p.85). When the demand exceeds supply, the suppliers would tend to increase the prices of the products. Due to this the people with higher purchasing power would be able to buy the products sold at higher prices while others would have to demand a better price and avail alternative options of buying the product. On the other hand, the fall in demand of the product would probe the suppliers to reduce the prices in order to increase the sales of the product (Mankiw, 2011, p.8). In recent years, it has been observed that the increase in demand of computers have led to the decrease in prices of the computers thereby offering the customers to buy computers at a lower price than before. There are a number of factors which can be attributed to the demand and supply of computers. The declining price of the computers could be easily determined from the demand-supply curve in the model of economics for demand and supply of products in a free market. An analysis based on the underlying theory is given in the next sections (Tucker, 2010, p.63). Objectives The purpose of this research study is to find the underlying reasons which have led to the fall in prices of computer as the demand for the electronic product has increased day by day. Initially the price of computers was high when few people used to buy or possess personal computers. With time, the need for computers increased which led to the demand of more and more computers. This rising demand has led to the fall in prices of the computers. The objective of this study is to analyze the factors that have led to the fall in prices of computers. This would help in understanding the theories of economics related to market demand-supply and undertake an analysis to find the application of the underlying theories of economics in practical conditions of the market. The study would help to provide an insight of the impacts of changing market condition on the prices of the products. The effects of the increase in demand of the computers on its prices in the market could be explained by relating the actual market scenario with the concepts of economic theories. The study also helps us to understand the effects of changing behavior of the market with the help of supporting data and diagrams. Analysis In economics theory, the demand and supply of a product plays an important role in determining the price of the product. The fall in prices of the computer is also attributed to a change in the demand of the computers. The price of computers would vary until the market reaches a point of equilibrium where the demand of computers is equal to the supply of computers (Carbaugh, 2011, p.11). Since the prices underwent a change with respect to the change in demand and supply of computers, the product is said to be elastic. The increase in demand of the computers in the market can be attributed to factors like increase in the number of population, change in preference, taste and level of livelihood, and finally increase in income levels of the people. More people started to afford computers which led to increase in demand of the computers. A statistical analysis given below shows that the number of computers shipped worldwide which reflect the growing demand of computers in the market (McEachern, 2011, p.16).The demand for computers thirty years back were in thousands and at present hundreds of millions of computers are demanded by the customers. Year No. of PC shipped Compounded Annual Growth rate of demand 1977 48000 33.25% 1998 93300000 1999 100000000 2000 140200000 2001 133500000 2002 136700000 2003 152600000 2004 183000000 2005 205000000 2006 239000000 2007 264000000 An analysis of the above data shows that the demand for computers has grown at an annual compounded growth rate of 33.25%. The increase in population has led to increase in livelihood activities thereby leading to people requiring more systems or computers for carrying out their daily activities. Demand of computers for business purposes rose by 75% while household computer demands rose by 15%. Also rise in the level of income due to effects of globalization has led to increase in purchasing power parity for the customers (Arnold, 2010, p.524). This also led to the change in preference and tastes of living. Affordability of computers started to increase thereby leading to a rise in demand for computers. According to the theory of economic for supply and demand the increase in demand of the computers with the same supply level in the market would lead to increase in the price of computers. In order to contain the rising prices due to the increasing demand, the supply of computers also increased drastically. The major factors that can be attributed to the increase in supply of computers are the increase in the number of suppliers, control of cost of different factors for manufacturing computers, research and advancement of technology, etc (Arnold, 2010, p.497). The electronic market segment being a profitable and sustainable business, a large number of computer suppliers and their distributors emerged in the market to cater to the increasing demand and in order to tap potential business opportunities. Advancement of technology, use of integrated circuits, research and developments carried out by the companies led to increase in supply of computers. Thus with increase in demand of computers, a highly competitive market segment emerged with a number of companies capturing close market share relative to each other thereby increasing the bargaining power of the customers (McGuigan, Moyer and Harris, 2010, p.97). A statistical figure corresponding to the competitive market share of companies selling computers is given below. An analysis would indicate that there are as many as nine companies who capture a market share of less than 6% in the market of computers. Company Market Share (millions) Market Share (%) Acer 2.15 38.30% Asus 1.7 30.30% HP 0.33 5.80% MSI 0.32 5.70% Dell 0.16 2.80% OLPC 0.13 2.30% Medion 0.13 2.30% Kohjinsha 0.06 1.00% Intel 0.06 1.00% Lenovo 0.04 0.70% Toshiba 0.03 0.50% All others 0.51 9.10% With the increase in demand of the computers, the demand curve in the demand-supply model has taken a rightward shift as illustrated in the subsequent section thereby leading to rise in quantity as well as price of the product. Subsequent supply increased to meet the increasing demands of computer thereby leading to increase in quantity but reduction in price. As a combined effect of increase in both demand and supply of computers in the market, the quantity of the computers available increased in response to the demands thereby leading to the fall in prices of the computer. Also due to increase in demand of computers, the manufactures started to manufacture of substitute products like laptop, palmtop, I-phone, etc. looking at the premium market segment and these products were available at lower prices than computer. These competitive prices of substitute products also led to the fall of prices of computer. Apart from this, the environmental factors like promotion of green work environments led to increase in demand and supply of computers and subsequently the prices of the computers were reduced following the demand-supply theory of economic. Economic advancements and social conditions like requirements at all stages of primary to higher education led to the rise in demand and supply and subsequent fall in prices of computers (Samuelson, 2005, p.48). Illustration The four basic laws of supply and demand are given as follows. Supply remaining constant, an increase in demand of computers would lead to subsequent shortage of computers in the market. As a result of this the equilibrium price of the computers would increase. A decrease in demand of computers would lead to surplus of computers in the market thereby leading to fall in equilibrium price. Now demand of computers remaining constant, an increase in supply of computers would lead to surplus of computers in the market and thus the equilibrium price would fall. On the other hand, a decrease in supply of computers under constant demand would lead to shortage of computers and this would lead to rise in equilibrium price of computers (Etro, 2009, p16). This can be explained with the help of following graph, where D1 and D2 are changes in demand and S is supply of the product. P1 and P2 are the corresponding change in prices and Q1 and Q2 are the changes in quantity of demand and supply of the product. As shown in the above figure, a rise in demand of computers has led to the rightward shift of demand curve in the demand-supply model of economics. As evident from the graph, this would lead to the rise in the level of quantity and the level of prices of computers. Similarly, in order to meet the increasing demand of computers the suppliers increased their level of production and supplies. For this reason the supply curve in the above figure would shift rightward. It can be observed that rightward shift of the supply curve in the demand-supply model would lead to increase in quantity but decrease in the price levels. Hence a combined effect of the rightward shift of both supply curve and demand curve would lead to rise in the quantities available and reduction in prices of computers (Hall and Lieberman, 2009, p.16). Also looking at the competitive scenario as depicted from the graph below, the percentage of market share for computer companies is fairly distributed apart from two leading companies. This gives rise to higher bargaining power of customers which would result in a fall of computer prices. Also the number of suppliers of computer being more, the suppliers themselves would need to offer attractive feature of their service and control the cost of manufacturing in order to sell their computers at competitive price. Thus the bargaining power of the suppliers would be less. All these factors would work in favour of the customer that would lead to the fall in price of the computers. Conclusion Fluctuation in prices of computer can be related to the literature and theory of economics explaining demand and supply of products. The demand and supply of computers play a crucial role in fixation of prices of computers in the market. The demand of computers increased over time due to several factors. These factors include the improvements in the level of income of people, the changes in taste and preference in livelihood, increase in population level, and environmental regulations of the society. The rise in demand of computers would cause rightward shift of the demand curve leading to rise in the quantity demanded and rise in prices of computer. In order to maintain the position of equilibrium, the supply levels to the market also increased with the increase in the number of suppliers, the advancement in technologies and research, cost control measures, etc. As a result of increased supply, the supply curve would shift rightward leading to rise in the level of quantity supplied and a reduction of level of prices of computer. Thus due to the combined effect of both increased demand and supply of computers, the quantity available increased leading to fall in unit prices of computers. Also due to the presence of large number of suppliers, the bargaining power of suppliers was low as they required offering competitive prices. The bargaining power of customer was high on the other hand as a result of large number of options available thereby leading to fall of computer prices. Reference Madura, J. 2007. Introduction to Business. Cengage Learning; USA. Mankiw, N. G. 2011. Principles of Economics. Cengage Learning; USA. Tucker, I. B. 2010. Survey of Economics. Cengage Learning; USA. Carbaugh, R. J. 2011. International Economics. Cengage Learning; USA. McEachern, W. A. 2011. Economics: A Contemporary Introduction. Cengage Learning; USA. Arnold, R. A. 2010. Macroeconomics [With Access Code]. Cengage Learning; USA. Arnold, R. A. 2010. Microeconomics [With Access Code]. Cengage Learning; USA. McGuigan, J. R., Moyer, R. C. and Harris, F. H. D. 2010. Managerial Ecobnomics. Cengage Learning; USA. Samuelson. 2005. Economics. Tata McGraw-Hill Education; India. Etro, F. 2009. Endogenous Market structure and the Macro Economy. Springer; New York. Hall, R. E. and Lieberman, M. 2009. Microeconomics: Principles & Applications. Cengage Learning; Stamford. Bibliography Mankiw, G. 2011. Principles of Economics. Cengage Learning; Stamford. Marshall, A. 2006. Principles of Economics. Osprey Learning; Washington. Schotter, A. 2008. Microeconomics: A Modern Approach. Cengage Learning; Stamford. Stewart, R. D. 1991. Cost Estimating. 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