Factors that determine the price of computers

According to Perkins, the question of economics arise because people need more than what they can get, but what each person can get is limited by time, income earned, price paid as a result people end up with unsatisfied needs or wants. All this is limited by the resource availability such as gift of nature, labor, tools etc. These supports the general definition of economics as a social science that studies the choices that individuals, businesses, governments and the incentives that influence and reconcile those choices (Parkin 2008)

Economics is further defined as a study of how society decides what, how and for whom to produce (Begg 2009) This means the society (or a group of people) has to solve three basic questions i.e. what goods or services to produce, how to produce them and for who (market to be served)

Computer technology began long in the past, as for this, I have traced the technology as since the 16thC, due to the high need for a tool for counting, computing, and processing data for man use at the time. Despite all the innovations from the ABACUS computer which is believed to be the first computer, a major step forward in the evolution of computer systems was the invention of punch cards in 1890.

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Computers are divided into different generations whereas in the 1950-1959 which is considered to be the first generation of computers, vacuum tubes were used as their logic element. The second generation computer was marked by the introduction of semi conductor’s digital technology characterized by computer reduced in size compared to those in the first generation. The third generation computers were made of integrated circuits while in the fourth, thousands of transistors and many other circuit elements were combined in a single chip.

COMPUTER COST

Prices of commodities are affected by the market in which they are traded. There are three types of economies which products are traded, namely

Command economy

Decision as to what to produce, how to produce and for who to produce is done by the government planners and firms are just taking what the government want.

Mixed economy

Both, the government and the private sector interact in solving the economic problems i.e. prices and availability of products. The government will be mainly involved in Taxation issues, subsidies and also provision of services especially the most sensitive ones such as defense etc. most of the countries uses this type although what differentiate one from the other is the level of government involvement (Begg 2009)

Free market economy

In free market economies there are very little state intervention. The operations in free market economies are balanced by government intervention which has a great impact on business activities and business decisions. The role is mainly on providing defense forces and internal police etc.(Stimpson 2004)

Prices adjust according to what people want, if the desire for the product is high then the price of that product will be high as well, and if the desire is low then the price will follow suit. In general the market price is determined by the desire to buy and the scarcity/availability of the product in question.

Despite the fact that the first, second and third computers were bulk and unreliable, computers were very expensive in those ages. Price of computers fell in the fourth computer generation. This is believed to be due to reduction in size and which lead to the introduction of personal computers.

Apart from the above factors, demand and supply of a product also affect it. Demand of a product also will be affected by the taste, trend and fashion.

Features of a free market Economy

There is private ownership of all economic resources

Resources are allocated according to demand(what customers want)

Information is obtained by the fluctuation of prices ie when the prices rises then firms assume that customers prefer the product or more is required.

Firms in a free market operate with the aim of making profit.(Stimpson 2004)

Demand

This is the behavior of buyers i.e. what quantity buyers wishes to purchase at a given price. And the trend shows that the price of a product will affect directly the amount that buyers are willing to buy, for example when the price is low demand will be high but when the prices increases the amount consumed tend to decrease.

Supply

Although demand shows that as the prices decreases more is consumed but sellers have their own wishes as to the amount they would like to offer to the market and this is supply. Supply is what seller’s wishes to offer to the market at a particular period of time. Sellers and buyers wishes can be equal at a certain point which is known as

Equilibrium point i.e. the price at which quantity supplied is equal to the quantity demanded. Demand and Supply can be summarized by the following diagram

P D Equilibrium point

S

E

fig 1.0 O Q

In the real market place, the equilibrium point is not reached as the prices of goods and services are constantly changing as a result of demand and supply fluctuations. For the case of computers prices will not reach equilibrium as new innovation and changes in technology and fashion occur everyday. This can be explained by the trend now whereby young generation prefers Net book computers to normal, also use of mobile phones for browsing instead of computers as its easy to carry.

DETERMINANTS OF COMPUTER PRICE

Price charged by a firm for a given product will tend to defer depending on the type of market the firm is serving, i.e. whether the firm is under monopoly (a market structure where there is only one producer/seller), oligopoly (where an industry is made up of few firms) or perfect competition (where there are many buyers and many sellers). Although this is what is assumed but in reality price of a product will depend also on the firm’s objectives such as profit maximization or sales maximization. When the firm is focused on profit maximization then the price charged will be high while if the focus is on sales then the price charged will be low but the firm focuses on the numbers,(unit sold). Apart from these factors, price determination also depends on the market structure the firm is serving.

Factors that affect a firm in choice of a pricing strategy of a product can be divided into two i.e. internal factors and External factors. Internal factors includes

Market strategies

Marketing mix strategies

Costs

Organizational considerations

External factors includes

Nature of the market and demand

Competition

Other environmental factors such as economic factors, resellers, Brand loyalty, government etc

There are several types of pricing strategies such as

Cost – plus pricing whereby the price charged is closely related to the cost of production.

Competition based pricing which will depend on what the competitors are charging for the similar product.

Creaming or skimming pricing whereby the price charged is high so as to maximize profit due to high investment costs.

Market oriented pricing which is determined by the nature of the market to be served and cost of production taken into consideration as well.

Price discrimination strategy whereby the firm sets different prices for different segment of customers in the market it’s serving e.g. cinema tickets (Wall 2007) So despite demand and supply, price setting will be affected by other factors as mentioned above. These are determinants of price and will affect the price of the product in question directly. The above mentioned strategies are just a few but there are others such as Psychological pricing, Penetration pricing, Loss leader pricing, market share pricing etc

Personal computer prices have fallen dramatically over the last 10 – 15 years.

As provided by the figure above, statistics have shown that prices of computers have been falling since 1996 and the list prices as in 2008. Many factors are argued to have lead to the fall in computer prices over this period of time.

The factors bellow as provided by mintel data base, suggest key determinants in the fall of computer prices being as follows

Competition between manufacturers and retailers

It is generally assumed that competition is the major determinant of the major factor affecting the product-price performance of a product. This mostly benefit the consumer because most of the time it leads to lower prices. Retailer Brands has also used price as a tool to capture the consumers. Computer industry is facing the same challenge as manufacturer’s competition leads each innovating into simpler technology which will lead to lower prices due to lower unit cost. (Swan 1974). Below diagram shows that when supply increases then prices of computers fall and this leads to consumers having more to spend thus resulting into more people affording to buy computers and that’s why as although the prices of computers are falling demand is increasing

P S1

D S2

P1

P2

O Q1 Q2 Q

Fig 2.0

Short product development cycles

Product development cycle has various stages which are followed till the product is launched in the market for consumption which includes

Idea generation

Idea screening

Concept development

Business analysis

Market testing

Technical implementation

Commercialization

New product pricing

Depending on the company policy and the product; these procedure may be altered, i.e. some of the steps may be eliminated so as to reduce the time of a product development. This can be well seeing in computer development as everyday new version of computers are launched by different manufacturers with new features and functionality thus making the product development cycle very short in the computer industry.

C1

C

Q

Q1

LRAC

Average cost

Output

Fig 3.0Economies of scale

This is where the business has cost advantage due to expansion in production (i.e. per unit cost). This is due to the fact that as the manufacturer increases the amount produced and the facilities used are the same this lead to the unit cost to be low, and this is applicable especially in the long run. As illustrated in fig 1.1 above, the long run average cost (LRAC) reduced (i.e. from C to C1) as output is increased (i.e. Q to Q1) using the same resources. Most of the computer producers have advantage of economies of scale as most of them produce in large quantities leading to per unit cost to be low, while the facilities are the same.

Diversification

Most of computer producers have expanded to produce other electronic products such as washing machines, Refrigerators, Driers etc in order to enjoy the economies of scale. This has lead to fall in computer prices as producers aim at maximizing sales by reducing prices. As long as turnover remains high, they enjoy the economies of scale. Good examples of computer manufacturers who have diversified are the Samsung, Sony etc, which have helped to reduce cost of production per unit. This is done through developing new products but selling in the same existing market, this can be further explained by the following table

Computers (product)

Existing New

penetration

Product development

Market development

diversificationM

a new

r

k

e

t

Existing

Fig 4.0

Substitutes (Net books)

In economics two goods are said to be substitute if one can be consumed in place of the other, for example development of mobile phones with internet browser system has reduced the need for people to travel or walk with laptops as they can read and respond to mails easily using their mobile phones. This applies to other functions as well which can now be done using the mobile phones instead of computers. After the computer manufacturers realizing this they came up with a new and cheap innovation; which is a Net Book Computers, which are small and easy to carry around and they are lighter. Under this version still the consumer can opt for the screen size they need. (Reid 2008)

From the diagram it shows the effect if the price increases and also the effect when there is price fall. Example if the price increases from Y3 to Y2 the quantity for product Y falls but consumers moves to consume more of product X ie from X3 to X2.

(Mintel 2008)

Falling component costs

Producers of computer components are working to reduce cost of production of these components thus being able to sell them at a lower price. Companies such as Apple produce its own components which lead to more economies of scale. Falling prices of a product may not only be due to economies of scale, may also be a result of other factors such as economic factors (which includes changing exchange rates, changes in economic trend of the country), Political factors may also influence falling prices such as changing government policies. Social aspect can also influence the prices as what is the market trend at a given time; people tend to prefer Net Book to normal laptops or use of mobile phones than computers. The falling cost is derived from the concept where producers makes sure that always they produce until MR=MC and they don’t go beyond that as it will be unprofitable to the firm. This can be illustrated by the following diagram

P

MC

E

MR=MC-

Fig 5.0

O Q1 MR Q

Producers will produce between O – Q1 in order to maximize profit.

Price Elasticity of Demand

Price elasticity of demand is the responsiveness of the quantity demanded to a price change, taking constant all the other influences on the buyers decisions. Example when the quantity demanded is constant despite the changes in demand this is known as Inelastic demand. If the change in price equals the change in demand then this is known as Unit Elastic Demand, while if the change in quantity demanded is larger than the change in price then this is called Perfect Elastic Demand.

P D1

This shows an Inelastic

Demand curve which is

a straight line

D2

This Curve represents a Perfect

Elastic Demand

O Q

Fig 6.0

The prices for the personal computers fell in 2006, but the quantity demanded for computers increased and the revenue for computer industry increased due to the above reasons. (Parkin 2008)

Elasticity of demand will be influenced by the following factors which includes

Closeness of substitute – if substitutability of products are that close then the elasticity of demand will be Elastic. Computer industry is operating in a close substitutability condition, meaning that consumers have many options of substituting from more options, such as internet browsing can now be done from mobile phones, iPhones ,desktops have been replaced by laptops, whereby now people (especially the young generations) are even going for Notebook as its more portable than the normal laptops. With personal computers close substitute will also be between a Dell computer, Apple, Hewlett Packard or a Toshiba (Parkin 2008).

The proportion of income spent on computers – this shows that the more the income that people have for spending then the more elastic is the demand for the product. As people have more income then personal computers becomes a necessity thus demand for personal computers will increase.

Time elapsed since the price change – for example since the computer prices fell the quantity demanded at the beginning changed only slightly, but later the quantity demanded increased as people became aware of the advantages of computers and how they can simplify a lot of work, thus leading to the demand for computers to be elastic.(Parkin 2008).

Brand Loyalty – most computer consumers tend to be brand loyal, most believe that a certain brand is better than others example Apple computers, Dell computers, Toshiba and this can override the sensitivity to price change, meaning other brand prices may be falling but due to this brand loyalty consumers still stick to their brand they believe on.

CONCLUSION

An increase of innovations in computer technology in designing, and production of computers through deployment of computer technology itself increase the production hence unit costs dropped which also affects the final price of computer.

New innovation was not limited only in production of computers but also computer accessories, size & design of computers and packaging materials which have an effect on final price of computers.

Computer size and design affect transportation costs, the bigger the size the more cost in transportation. Modern computer are slick, flat screen and small hence easy to pack and delivery with less costs which eventually become cheap to buy.

Innovation has enabled accessories and parts of computer to be produced not necessary in one location, computer motherboard can be produced in USA while mouse can be produced in Taiwan and key board in Germany and assembling done in China. By this decentralization of manufacturing it has been possible to produce computer at lowest cost possible.

Mass production in Asian countries such as India, China and Taiwan whereas in these countries labor is cheap as compared in western countries hence the production costs of computers dropped significantly which ultimately drop selling price.