A Study On Business Managerial Economics
Title: Examine the factors that determine the price of computers in a free market. In recent years, the price of personal computers has continued to fall even in the face of increasing demand. Analyse with the aid of diagrams how this has happened.
A free market is a market whereby all economic decisions are made by the household and firms, which are assumed to work to their own self interest and where land and capital are privately owned. The determination of price has to do with the interaction of the demand and supply curves (price mechanism) and the behaviour of consumers in the market. In a free market it is assumed that private individuals are out to maximised profits, consumers seek to get the best value (utility) for money from their purchases and workers seek to maximise their wages relative to the human cost of working in a particular job. In this economy as well, individuals are free to make their own economic choices, workers are free to choose where to work and how much work to do and firms are free to choose to what to sell and what production methods to use.
So in order to determine prices in a free market the price mechanism comes into action which will be discussed subsequently. Also, there will be need to discuss the various factors determining prices in relation to change in quantity demanded and change in demand of personal computers. When any other factor that influences buying plans other than price is called change in demand but when it is only price that influences buying plans is called change in quantity demanded. These will all be buttress with tables and curves in this discussion accompanied by the factors itself and some reality factors determining the price of computers in a free market. #p#分页标题#e#
According to Powell, the market for energy drinks has exploded over the past few years and in 2007, Europeans spent almost €4 billion on these drinks. Despite this huge increase in consumption, the prices of energy drinks have been remarkably stable as dozens of new producers have entered the market. However, the prices of personal computers have tumbled and have not been stable. The price mechanism works in line with shortages and surpluses in the market and prices respond as well to surpluses and shortages since shortages cause prices to rise while surpluses cause prices to fall. If consumers decide they want more of computers or if supplies decide to cut back supply of computers, the demand will exceed supply hence leading to a shortage. The resulting shortage of computers will encourage suppliers to raise the prices of computers. This will therefore act as an incentive to suppliers to supply more of computers since production will now be more profitable. At that time, it will discourage consumers from buying computers. According to John, the price will continue rising until the shortage has thereby been eliminated.
If on the other hand, consumers of computers decide they want less of it or if producers of computers decide to produce more computers, supply will exceed demand resulting to a surplus. This surplus will encourage producers to cut back the price of computers. This will act as a disincentive for producers, who will supply less, since production will not be less profitable. This will encourage consumers to buy more. According to John, the price will continue to fall until the surplus has thereby been eliminated.
The best and most reliable price for both the suppliers and consumers is where the demand for computers equals the supply for computers. This is called the equilibrium price, which means a point of balance or a point of rest. John S. calls it a point towards which there is a tendency to move. It's essential to know that the response of demand and supply to changes in the price illustrates a very important feature of how economies work.
When a factor such as price influence buying plans of computers we talk of a change in quantity demanded. In order to study this, there is need for the assumption ceteris paribus that is we keep all other influences on buying plans the same. The question now is how, other things remaining the same, does the quantity demanded of computers change as its prices changes? This question is answered by the first law of demand which states that "other things remaining the same, the higher the price of computers, the smaller is the quantity demanded and the lower the price of computers, the greater is the quantity demanded." Now a higher price of computers lead to a fall in its quantity demanded because of the income and substitution effects according to Powell P. In the case of the substitution effect, when the price of computers raises, other things being equal, its relative price and its opportunity cost rises. Although computers are unique, it has got substitutes that are other goods that can be used in its place. For instance, in real life now we have I phones and net books that have services similar to computers. As the opportunity cost of computers rises, people tend to buy less of it and go for substitutes which slightly the case in present life. People have tended to purchase more of I phones and net books. #p#分页标题#e#
As concerns the income effect, when the price of computers rises and other influences on buying plans remain unchanged, the price rise relative to incomes. Faced with a higher price and an unchanged income, people will practically be unable to purchase computers as usual. A diagram can be illustrated to show a change in quantity demanded where the only influence on buying plans is price ceteris paribus
From the figure above, p is the initial price; we see at p2 an increase in price leads to a fall in quantity demanded q2 that is a contraction in demand. But a decrease in price leads to an increase in quantity demanded that is an extraction in demand (ceteris paribus).
But when any factor influences the buying plans other than the price of computers changes then it's a change in demand. Six factors bring changes in demand. They include income, prices of related goods, expected future income expected future prices, population and preferences. Consumer's income influences demand because when income increases, consumers will buy more of computers and when income decreases, consumers will buy less of computers. Although increase in income leads to an increase in the demand for most goods, it does not lead to an increase in the demand for all goods. A normal good is a good whose demand increases as income increases and an inferior good is one whose decreases even when income is increasing. Computer is a normal since an increase in income will lead to an increase in the demand for computers.
A change in any influence on buyers' plans other than the price of computers itself result in a new demand schedule. A change in income changes the demand for computers. At a price of £1.5 a computer, 4 computers are demand at the original income and 8 computers are demanded at the new higher income. A rise in income increases the demand for computers since the demand curve shifts rightward as shown by the shift arrow and the resulting red line.
The quantity of computers that consumers plan to buy depends on their substitutes which is a good that can be used in place of a computers and a good example is an I phone or net book. A decrease in the prices of its substitutes, the lower will be the demand for computers while an increase in the prices of substitutes, the higher the demand for computers. This is a real life example between computers and I phones. In light manner, computers too have complements such its drivers, software. An increase in the prices of computers' complement, the lower will be the demand for computers and the lower the price of computers the higher the demand for computers.
When expected future income increases, the demand for computer might increase as well. For example a waiter gets the news that he will receive a big bonus in future after six months, so he go on and buy a computer right now. So there is problem now of the recession, whereby even if there is a future increase in income, its less likely that an individual will go now for a computer. Also, if the price is expected to rise in the future, and if computers can be stored, the opportunity cost of obtaining the computer for future use is lower today than it will be in future when the price increased. So people retime their purchases and they substitute over time, they buy more of computers now before the price is expected to rise and so demand tends to increase and the reverse is true when the price is expected to fall in future. According to Powell, computer prices are constantly falling and this fact poses a dilemma. Will you buy a new computer now, in time for the start of the academic year or will you wait until the price has fallen some more? Because people expect computer prices to keep falling, the current demand for computers is low and the future demand will be higher than it otherwise could be. #p#分页标题#e#
Demand also depends on the size and age structure of the population. The larger the population, the greater is the demand for computers and the smaller the population the smaller the demand for computer. Its clear that the demand for computers in London is considerably that the demand in Bristol because of the difference in population. Also, the larger the proportion of a population made up of workers and scholars, the higher will be the demand for computers. Preferences also determine the demand for computers. If many adverts are made on the advantages of owning a computer are made then many people will shift to its consumption.
There has been a continuous drop in the price of personal computers even in the face of increasing demand in recent years due to several reality reasons. As Powell rightly said, the prices of computers have greatly been in a kind of dilemma. People have tended to discover that the prices of computers are dropping continuously, so they have decided to demand even more when to price has dropped in future. One of the reasons for this situation is a consistent increase in the level of technology. Time and again new brands and levels of computers do come into the market, this now brings in competition amongst the various producers since they want to make known the new technological increase they have. Now demand has already increased but the prices will eventually drop due to competition in the market of computer. So we have seen above that both increase in technology and competition come in to show a drop in prices and a rise in prices.
Another reason is that since consumers of computers foresee that the prices of computers will continue to drop, they decide to demand more in future hence bringing a shortage in market for computers. In that quest (that is looking at that present price and demands) producers are forced to drop their prices so as to gain back their purchase. The diagram below can show how there has been a drop in prices of computers even in the face of increasing demands.
From the figure above, at an initial price of £10000, five computers are bought but when the demand for computers increases as show by the shift of the demand curve from D-D1, there is an increase in demand from 5 computers to 10 computers but a drop in price of £5000. Basically, this applies to the first law of demand that a drop in price leads to an increase in demand.
Therefore, I can convincingly conclude that an increase in demand for computers leads to a fall in price (1st law of demand). This apparently is effective when the factors that determine the buying plans of consumers is other than price.
John S. (2007), The Essential of Economics. (4th edition). The Prentice Hall
Powell P.M. (2007), Economics. (7th edition), The Prentice Hall#p#分页标题#e#
John S. (2005), The Economics Environment of Business, The Prentice Hall
Ken H. (2004), Economics Theory in Action, (4th edition), The Prentice Hall
Richard W. (2008), Breeding toxins from dead Personal Computers, The Guardian