Demand, supply and free market economy

Market is described as a meeting place of buyers and sellers for which a good/service is offered for sale by producers and purchased by consumer (Blake, 1993). Business managed by the laws of supply and demand, not restrained by control interference, regulation or subsidy is best as known as free market. A free market economy is a system in which the distribution for resources is determined only by their supply and the demand for them. This is mainly a theoretical thought as every country, even capitalist ones, places some limitations on the ownership and exchange of commodities. The market equilibrium occurs at the price where consumer’s willingness to demand is equal to firm’s willingness to supply (Begg and Ward, 2007) In other words the relationship between the demand and supply determines the equilibrium position of a particular good or a service in the market place where no economic forces are being generated to change the situation. For a particular good in the market this position is said to be existed when there is no excess demand and excess supply. In other words demand should be equal to supply.

HISTORY ON COMPUTERS

Computers were seen as technically superior goods which were sold first to its domestic market, then to other technically developed countries. Moment in time, it is being imported to the developing countries and which eventually produced by their citizens. For international trade, the long-term pattern is that the trades among countries are being mostly influenced by product innovation (invention) and subsequent diffusion. The diffusion for computer product is so rapid and influential that it has now become almost impossible to complete a task in the workplace or schools without the assistance of a computer both in the develop and developing countries.

Supply and demand, in old economics, are factors that are thought to determine price, by showing a relationship between the amount of a given article of trade manufacturers who anticipate to sell at a certain price (in other words supply), and the amount of that article of trade that consumers are prepared to buy (in other words demand). To supply means producing varying amounts of a good/service that producers to be sold at different prices; in general, higher prices could lead to a greater supply. Demand refers to the quantity of a good that is requested by consumers at any given price. According to the law of demand, demand decreases as the price goes up. In a completely competitive economy, the provision of the upward-sloping supply curve and the downward-sloping demand curve yields a supply and demand schedule that, so that as the two curves meet at a point, the equilibrium price of an item could be arrived at. The information on supply and demand is sourced from Alfred Marshall‘s 20th century theories, which acknowledges the role of consumers in price determination, rather than taking the old economic theory which focuses completely on the cost for the producer as a determinant. Marshall’s work reveals together the old supply theory with more recent developments directed at the utility of a commodity to the consumer. Recent theories, such as indifference-curve analysis and revealed preference, give more credence to the supply and demand theories formed by writers of marginal utility. The theory of elasticity is important as well: it reveals how certain goods will bear a considerable increase in price if there is no evenhanded substitute available, while other easily disposable merchandise cannot do so without losing big business to competitors.

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The relationship that exit among consumers and suppliers of a good in a market is well known as demand and supply model in the field of Economics. In a free market, price and quantity sold in a market of a particular commodity such as computer. In recent years, the availability and affordability of computer act as a significant part in high demand of it and to fulfill the required demand suppliers/ producers supply more and more computer in market. Klein (1983)

DETERMINANTS OF THE PRICE OF COMPUTERS IN A FREE MARKET

There are a number of factors which can influence the demand and supply of computers and for this reason the price is without human intervention determined from the demand-supply curve in a demand-supply model.

Some variables that influences demand for computers are the increasing number of population, preferences, income etc. All these factors affect the demand of computers positively by a right shift in demand curve that increases price and quantity of computers which may yield a shortage of computers in market. For instance, an increase in demand as a result of the effect of one of the determinant of demand say, an increase in the population size of computer users will shift the demand curve rightward. The increase in population size is as a result of computers being used by most people in the less developed and the developing countries which some years back computers were used by the developed population. The effect of an increase in the size of the population on price and demand quantity for computer can be seen in the figure below.

An increase in demand as a result of population increase will shift the demand curve rightward. That is, the original demand curve D and supply curve S intersect to produce equilibrium E with price P and quantity Q. an increase in population influence demand to shift the demand curve rightward to Do, taking the new equilibrium to Eo, price rises to Po and quantity increases to Qo. The net effect is that there is a shortage of demand represented by Z in the figure.

In addition to all that has been mentioned the supply of computers influenced by the number of suppliers, cost implications of the different factors of production, technology etc will be imperative. These three factors have a positive impact on supply of computers in computer marketplace so we witness a clear right shift in supply curve which reduces the price and increases the quantity of computers which may yield the surplus of computers.

An increase in the number of producers for producing computers will cause an increase in supply of computers in the market place and hence the price. Since the suppliers can now enjoy more profit for producing the commodity in question, they will produce more of computers causing a rightward shift of the supply curve for computers. Assuming that the original demand and supply curves for computers are D and S which intersect to produce equilibrium at E with price of P and quantity Q. the resultant effect of incentive to make more profit by producers motives them to increase supply which shifts the supply curve to So, taking the new equilibrium to Eo. The Price of computers falls to Po and quantity increases to Qo.

Source: www.investopedia.com

Finally, we get the complete representation of the topical computer market if we merge both rightward shift of demand and supply curve of computer in marketplace together in demand-supply model. In this case, the quantity increases but the price of the computer might fall or rise. For a certain shift of computer demand and certain shift of computer supply the price will not be changed but a little greater shift in supply curve than the certain shift will decrease the computer price.

THE CHANGE EFFECT OF INCOME AND SUBSTITUTION ON THE PRICE OF COMPUTERS

Another angle to this issue is to look at it from what is called the income effect and substitution effect of a change in price. Demand of a commodity, say computers, is the quantity of the commodity that consumers will be able to purchase at a particular price over a stated period . Demand is influenced many factors like population, taste, income, the quality of the goods or services being offered, and the availability of competitors’ goods or services and so on. These factors influencing demand can be group into two, the substitution and income effects.

The substitution effect emphasizes the change in the consumption (demand) of a commodity resulting from a change (in the opposite direction) in the consumption of a second (related) commodity. For instance, a reduction in the price of computers (the product in question) would make substitutes relatively expensive and the consumer would demand more of computers. In essence the quantity demanded for computers would increase.

The income effect on the other hand focuses on the change in real income resulting from a price change. An increase in the price of computers for instance would lead to a fall in the real income of the consumer. The consumer would purchase less of every good including computer.

Therefore the income and substitution effects acts to enforce a negative relationship between price and quantity demanded in a free market. The figure below explains it.

The substitution effect is defined by sliding the budget line around a fixed indifference curve; the income effect is defined by a parallel shift of the budget line. The original budget line is at ab and a fall in the price of computer takes it to aj. The original equilibrium is at E with Q of demand computer, and the final equilibrium is at E1 with Q1 of computer demanded. To remove the income the income effect, we shift the aj to a parallel line nearer the origin until it just touches the indifference curve that passes E. the intermediate point E0 divides the quantity change into a substitution effect Qo-Q and an income effect Q1-Q0. It can also be obtained by sliding the original budget line ab around the indifference curve until its slope reflects the new relative prices.

SUPPLY

Supply is the quantity of goods that producers are willing and able to provide at a cost or price over a given period of time. With supply, two factors are vital; the willingness to supply and ability to supply.

With the willingness to supply, an increase in price of a commodity offers an increase in profitability given cost. Hence an increase in price provides an incentive for producers to produce and supply more to the market.

ABILITY TO SUPPLY

Another issue is the ability to supply. An increase in supply (production) is usually accompanied by an increase in cost. Cost of producing additional units of commodity is usually high particularly when production exceeds the reserve capacity: extra labour hours would be paid overtime, therefore complex technology may be required to acquire additional raw materials, etc. an increase in price provides a motivation to produce more since the extra price could cover for these additional costs. The supply curve is therefore positively slope, indicating that more is supplied at a higher price other things being equal.

The market for computers represents that of a technology whose prices were far above their cost of production. The cost of producing a computer was relatively higher 20-30 years ago. However its price was very high making them very profitable.

As the technology to produce them (computers) diffused, more producers (manufacturers) in an attempt to make profits entered into the market and supply more computers. Existing suppliers of computers also increase their output because of their willingness to make more profit. The increases in supply will cause the supply curve of computers to shift to the right. The suppliers of computers are very sensitive to price. They respond rapidly to prices due to the presence of competitors (other manufacturers).

On the demand side, the use of computers has become more of necessity; people find it imperative to have computers in their homes and work places. Students, even those in the lower grades, require computers to do their work. Therefore users or purchasers of computers are rather relatively less sensitive to the price of computers.

The net effect of these rightward shifts in demand and supply are shown in the graph below:

The original demand curve DD intersects with supply curve SS at price P1 and quantity Q1. Computer users being relatively less sensitive to price of computers will increase quantity demanded for computer resulting in a shift in demand from DD to DD1. On the other hand, producers being motivated to make profit increase supply of computers into the market place shifting the supply curve from SS to SS1. The new meeting point of DD1 and SS1 produce P2 and Q2 which shows a fall in price from P1 to P2 and an increase in quantity demanded from Q1 to Q2

Conclusion

Demand and supply are the key determinants in the price of computers .The ability to manage them will help control the price of computers. The above document has highlighted factors that could control this tapping on economic theories and principles from well known authors and commentators.

REFERENCES

Landsburg, S (1999), Price theory and applications , 4th edn. Cincinatti: South —Western College Publications

Perloff J (2001), Microeconomics 2nd edn. New York: Addison-Wesley

Pindyck, R & D. Rubinfeld (2001), Microeconomics 5th edition,Upper Saddle river, New Jersey: Prentice Hall

Begg, D. and Ward, A. ( 2007), Economics for Business, 2nd edition, McGraw Hill Publications

Hubert, H. (2004), Business and Economics

Klein, L. (1983), The Economics of Supply and Demand

Cuthbertson, K. (1985) The Supply and Demand for Money.

WEBSITES

http://www.investopedia.com/university/economics/economics3.asp, Accessed 02 December 2010.

http://www.netmba.com/econ/micro/supply-demand/, Accessed 5th December 2010