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Worldwide, PC sales totalled about 100 million in 2002 (Samuelson, Nordhaus 2003). In the wake of falling prices, PC industry has experienced a continuous boom. Today, PC has become an indispensable product. This paper will discuss the factors that have had an impact on the price pattern of this indispensable product. To do so, some basic concepts of economics will be introduced.
A market is a mechanism through which buys and sellers interact to determine prices and exchange goods and services. Prices direct the decisions of consumers and producers in the market. Higher prices tend to reduce consumer purchases and encourage production. Contrariwise, lower prices encourage consumption and dampen production. Therefore, prices are the balance wheel of the market mechanism (Samuelson, Nordhaus 2003). The following graph justifies this concept:
It is imperative that an accurate interpretation regarding changes in price and quantity of a particular product is done. This is because the change in quantity as a result of a change in price could be instigated from either the demand side or the supply side (McCain 1981). For example, if fewer airline tickets are sold, it could either mean that the airfares have surged or demand for travel has plummeted. Studying the price behaviour in conjunction with the quantity can sometimes lead to meaningful conclusions. This can be substantiated with a change in the price of bread leading to a change in quantity demanded. Rising price of bread leading to reduced sales suggests a decrease in supply and therefore, a change in the supply curve to the left. On the other hand, rising price of bread leading to a surge in sales indicates that demand has outweighed supply.
In relation to demand and supply, it is important to introduce the concept of elasticity. Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price (McCain 1981). If demand is elastic, it means a small change in price will cause a significant change in demand. An inelastic demand, on the other hand, does not reveal the same characteristics. Following is a graphical representation of elasticity of demand:
(http://www.sparknotes.com/economics/micro/elasticity/section1.html)
Goods that have ready substitutes tend to have more elastic demand than those without any substitutes. Food, for example, is demand-inelastic as there is no substitute for it. So even if the prices do increase, there will be no effect on the quantity consumed. On the other hand, if price of coffee goes up, consumers have substitutes to choose from, like tea or cola and this may cause a drop in demand.
Economic history indicates that the total output in the United States has increased tenfold over the last century. Much of this increase in output stems from the technological change which has improved productivity. An example of a technological change is when a firm adjusts its production process to reduce waste and increase output. This is termed as process innovation and it differs from product innovation whereby innovative products are introduced in the marketplace (Russell, Wilkinson 1979). Process