Factors That Determine Computer Price In 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 a diagram how this has occurred.
Prehistoric men did not have the computers and internet but its appears that they needed a way to count and make calculations. The limitations of the human body's ten fingers and ten toes apparently caused early people to construct a tool to help with those calculations. Pause for a moment and consider a typical day in your life. For breakfast you might have sat on a chair from a tree grown in sweden, eaten bread made in a local bakery from wheat grown in the USA and beaf from cows raised in Ireland packaged in plastic bags made in the UK. We use a computer, assembled and packaged in China but electronic chips designed in USA, so people’s needs and choices created such a behavioural or social science where they use scarce resources that nature and previous generations have provided.
In Economics, the market relations between prospective sellers and buyers of a good are known as Demand and Supply. The Price and quantity sold in a market is determined by the Demand and Supply model. The phrase “supply and demand” was first used by James Denham-Steuart in his book named Inquiry in to the Political Economy which was published in 1767. Since the 19th the theory has been unchanged. There is always a change in Demand and Supply of a particular product in a market due to various reasons. There are few products whose demand or supply doesnt change with respect to price. These are known as inelastic products. A very good example of perfectly inelastic product is Pencillinn. There are elastic products too which demand changes with respect to price and people dont hesitate to opt for a cheaper alternative. Tea and coffee are the best example of an elastic product.
This theory focuses on the factors that determine the Demand and Supply of Personal Computers in a free market. The report has been prepared through in-depth analysis of the market. The yearly price and sales of PC’s and through various suppliers are examined and collected obtain this report. After description of the factors affecting Demand and Supply of PC’s graphs are provided to understand the future market as well. Different websites and articles were of great help which were acquired from our college library.
Market Structure :
In 2001, 125 million personal computers were shipped comparison to 48 thousand in 1977. More than 500 million personal computers were in use in 2002 and one billion personal computers had been sold worldwide since mid 1970's until this time. Of the later figure, 75 percent were professional or work related, while the rest sold for personal or home use. About 81.5 percent of personal computers had been shipped desktop computers, 16.4 percent laptops and 2.1 percent servers.
United States shared a massive part of shipment 38.8 percent (394 million) of the computers, Europe 25 percent and 11.7 percent had gone to Asia-pacific region, the fastest growing market as of 2002. The second billion was expected to be sold by 2008. Almost half of all the households in Western Europe had a personal computer and a computer could be found in 40 percent of homes in United Kingdom, compared with only 13 percent in 1985.
The global personal computer shipments were 264 million units in the year 2007, according to ISuppli Corporation, up 11.2 percent from 239 million in 2006. In year 2004, the global shipments were 183 million units, 11.6 percent increase over 2003. In 2003, 152.6 million computers were shipped at an estimated value of $ 175 billion. In 2002, 136.7 million PC's were shipped, at an estimated value of $ 175 billion. In 2000, 140.2 million personal computers were shipped, at an estimated value of $ 226 billion. Worldwide shipments of PC's surpassed the 100 million mark in 1999, growing to 113.5 millions units from 93.3 million units in 1998.
Future Market :
As of June 2008, the number of PC's in use worldwide hit one billion, while another billion is expected to reach by 2014. Mature markets like the United States, Western Europe and Japan accounted for 58 percent of the worldwide installed PC's. The emerging markets were expected to double their installed PC's by 2013 and to take 70 percent of the second billion PC's. About 180 million computers (16 percent of the existing installed base) were expected to be replaced and 35 million to be dumped into landfill in 2008. The whole installed base grew 12 percent annually.
Increasing number of Personal Computers effect Microsoft Windows systems, the average selling price showed a decline in 2008-2009, possible due to low cost notebooks, drawing $ 569 for desktop computers and $ 689 for laptops at U.S. retail in August 2008. In 2009, average selling price had further fallen to $ 533 for desktops and to $602 for notebooks by January and to $540 and $560 in February. According to research firm NPD, average selling price of all Windows portable PC's has fallen from $659 in October 2008 to $519 in October 2009.
Factors Affecting Demand and Supply of Personal Computers
Price of Personal Computers :
From 8500 B.C. to late 19th century human beings have been inventing different machines with different names to solve their business, mathematics and defense related issues throughout the world. In 1976 Apple took a giant step in the international market producing personal computers and introduced Apple I at the Homebrew Computer Club, California with a price of $ 666.66 followed on with Apple II for $ 1,195 including 16K of RAM. Microsoft sales for 1989 reached by remarkable $ 1 billion by making software programs for micro and network computers leaving other software companies behind.
The demand of Personal Computers and its accessories will gradually increase in future. There are various manufactures are available in the market today who are providing services in desktop computers, Laptops and network servers. Table below is giving an overview different suppliers in the market and their share of market occupation :
The law of demand states that quantity moves in the opposite direction of price, this effect is observed in the downward slope of demand curve. The demand of personal computers has kept on increasing due to various aggressive innovation, competitors, research and development in computer industry. The intensive advertisement on T.V. media, newsletters, radio, world wide web and the transports helped to increase the demand of PC’s and its accessories. There are quite a lot reasons to the increase of demand of Personal Computers. Manufacturers are trying to launch their products equipped with latest technologies to take part in a market full of competition. Computers have become nuts and bolts of almost every area of defence related issues, industries, administration, medical science etc., human needs will be demanding electronic machines full of technology to the manufacturers in the future.
The price of Personal Computer’s price has been coming down year by year as more competitors entered in market with their products and new brain storming ideas and innovation in research and development are getting progress, therefore there is a increase in demand but if prices gets high then there would be less demand for Computers.
The Price of Substitutes (Laptops) :
Laptops are very popular today, and for a variety reasons. These reasons designate the considerations as to what one should look for when buying a laptop. Still, the insight gained will allow buyers to make specific, more informed decisions when looking for just the right laptop for an individual’s particular desires and needs.
First, the most obvious reason to buy laptops is that they are preferable to desktop computers due to their size and construction. Laptops, by design, are smaller and more compact, so they easily portable. To make the deal even better, their hard-drives hold just as much space and memory as desktops, perhaps even more, now that current technology is creating the ‘better functional’ in miniscule form. The thing about the laptop in regards to its size and shape is that these allow the busy college student or professional to do their work while out-and-about, say, while eating lunch or relaxing at a coffee shop. The second reason for choosing laptops over desktops is that they can be found cheaper than the latter. Some quality laptops can actually be found under £400 at the right places and at the right time. A third reason the laptops are preferable over desktops is that they can run on a long-lasting battery and do not necessarily require a wire hookup to access the Internet.
The Laptop industry is expected to grow at a faster rate in developing countries compared to the developed countries. Therefore, changes in government policies in developing countries like India and China can affect the potential growth rates in their markets. For instance, the removal of import duties on laptops in India in 2005 was one of the factors that resulted in a growth of 94% in laptop sales in 2005. With analysis of Manufacturers' Association for Information Technology (MAIT) in first half of the current financial year, 153,000 notebooks already been sold as compared to 36,000 in the same period two years ago. Physorg.com (2006) India’s laptop sales up.
Changes in demand and new technologies will continue to alter the outlook for the computer industry and market in the coming years. New demand for low cost ultraportable laptops – called netbooks – has created new competitors like ASUSTek as well as forced companies to change their business models to succeed. New technologies such as cloud computing and hosted virtual desktops (HVDs) may change the requirements of the Laptop industry. So new competitors’s products with similar and more enhanced functions can effect the stable and unstable demand of the product. This will likely affect the profitability of existing manufacturers. Since the laptop industry represents a segment of the broader personal computer (PC) market, data regarding the PC industry is also relevant in the analysis of the laptop industry. According to the Law of demand if price of a particular product increases then demand for that substitute product would increase as well, therefore if Personal Computer‘s price goes higher then demand for laptops would increase as well which we can elaborate in the following graph :
Similarly if the price of complements increase for a specific product then its demand gets less in the market, e.g., complements for a personal computer are monitor, printer, mouse, wifi broadband connections, therefore if complements prices are higher then demand for PC’s would decrease which we can describe easily with a demand curve :
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received in a given period of time.
Income can increase in two ways, first is the wages, pension, funds, state benefits increase and second is if the inflation rate gets lower. Changes in income can increase and decrease demand of a product. A good whose demand increases with an increase in income is called a normal good, whereas a good whose demand decrease with an increase in income is called inferior product. For example with an increased income people would more tend to buy laptops, cars, holiday tickets etc., while with an increased income people would tend to eat personal compueters or laptops rather than buying tape recorders or cd players. We can elaborate this law of demand with an increased income graph which would do shift right and being presented by variable D2 and decrease in demand is shown by D3:
Population growth is primarily caused by natural increase, that is, the excess of births over deaths. But in any particular region, migration will cause population growth when the amount of immigration exceeds the amount of emigration. The global human population is projected to grow from 6.83 billion in 2009 to 9.15 billion in 2050, an increase roughly equivalent to the population sizes of India and China combined in 2000 and nearly the size of the whole world population as it was in 1950! However, population growth will vary greatly between different world regions, the greatest growth being in the less developed regions of the world.
The economic reforms in China over the past two decades have brought outstanding growth, the development of a private sector and significant reform of the state-owned sector and productivity has improved dramatically. China has become a significant global economic player today which is operating as a source of regional and global production networks in computer and accessories. It is best known for its richness in the economy. Thus, it attracts huge number of foreigners to invest in the country and therefore boost the society to become world ranking in their system of global and industrialized economy.
Increase in population we can describe as shift right in the following diagram :
Preferences are in favor for Demand :
There are different preferences which can effect computers demand. Advertising is a non-personal form of promotion that is delivered through selected media outlets that, under most circumstances, require the marketer to pay for message placement. Advertising has long been viewed as a method of mass promotion in that a single message can reach a large number of people. Media has become a huge channel of promoting and advertising products in the market. T.V., newspapers, transportation systems and millions of websites are best source for getting upcoming information of products, e.g,. Dell computers do not have any retail outlet, infact they are advertising newspapers, t.v. online and leaflets.
As computer has become the nuts and bolts of every corner of life from schools to univerrsities and from local security offices to national security. In the long run Personal Computers demand would be increasing becuase more people are coming to education, more business are adopting computerised financial systems and new innovation, research and development from manufacturers.
The education and income level of users affects the brand perception of the computer manufacturers. As shown in Figure, households with higher income have higher percentages of Apple computers. Such households are also more likely able to afford (and want) Apple computers. This has allowed Apple to continue its strategy of premium pricing and performance compared to Windows PCs, while at the same time increasing its market share of the total laptop and PC market.
There are also some preferences which can be against the demand of computers. Income decrease can straightway effect demand of computers and its accessories when people have less money for their expenditure. Natural disasters like, floods, diseases, electricity shortfalls can also effect decrease demand. Political factors of any country can change the sales and demand of computers, e.g., if country has gone into a war-torn situation then there is lack of demand.
Future Price Expectations :
Future prices are direct responsible for increase or decrease of demand of any product. If people know that computer prices are going to be exceed in near future then they would start buying computers, there would be increase in demand for short term only but eventually if prices are increased in future then there would be less demand. Figure below can elaborate increase and decrease of PC’s demand according to future price expectations :
Factors Effecting Supply of Personal Computer’s
Price of Computers :
Two types effect any industry or organization internal and external :
Internal Factors :
External Factors :
Increasing focus on the environmental impact of high-tech trash has lead to more stringent environmental regulations on the electronics industry such as the RoHS (Restriction of Hazardous Substances) and WEEE (Waste Electrical and Electronic Equipment) Directive. The additional testing and certification involved directly affect the supply chains for laptop and PC manufacturers, resulting in increased costs. For instance, in Canada, the enforcement of the WEEE Directive will increase the cost of computers by $15. The increase either affects the consumer or reduces profitability for manufacturers.
Example Waste Electrical and Electronic Equipment :
The purpose of the WEEE Directive is to prevent waste electrical and electronic equipment (WEEE) and to facilitate the reuse, recycling and other forms of recovery of such wastes. The responsibility for the disposal of WEEE is imposed on the "producers" (as defined in the WEEE Directive) of such equipment. Producers should establish an infrastructure for collecting WEEE, in such a way that "users of electrical and electronic equipment from private households should have the possibility of returning WEEE at least free of charge." Also, it compels companies to use the collected waste in an ecologically-friendly manner, either by ecological disposal or by reuse/refurbishment of the collected WEEE.
Conclusion of above example :
Economic and Social Issues
WEEE itself is an economic resource, with material value currently estimated in the order of magnitude of €2 bn a year. Whilst the economic costs for society of collection, disposing of and treating WEEE are estimated to increase to €5.6bn a year by 2020, including activity by public and informal sectors. With most of this activity taking place in the EU and rest of the world, this waste management activity brings revenue and employment to a waste treatment sector employing much manual labour. With increasing costs of wasting and disposing waste the suppliers have to pay to the recycling companies, can effect the price of electrical products and appliances in the market.
The global economy influences various different factors that can affect the price and growth of the PC industry. Since early 2008, the slowing global economy is one of the reasons for the decrease in business capital spending for small and large corporations, resulting in reduced demand for PCs. Gartner, Inc. forecasts a decline of 3.8% in global IT spending, of which computing hardware spending is expected to decrease by 14.9% in 2009. Though this decline in IT spending is likely to recover slowly during 2010, the global PC market is expected to face declining growth rates in terms of market value, from an expected 5.4% growth in 2009 to 4.1% in 2012. Most PC manufacturers such as Dell, HP, Acer, Lenovo, and Apple generate sales throughout the world and therefore currency exchange rates are an important factor as well. The strength (or weakness) of the US dollar versus other currencies can directly affect a company’s bottom line. The economies in developing countries such as China, India, Brazil, and Latin America are growing at a much faster rate than developed countries and therefore provide better growth opportunities for computer manufacturers, since developed countries like the US and Japan have become saturated. This trend is reflected in the slower single digit growth in the last few years as opposed to the consistent double digit growth in the developing markets.
Social factors such as education, preferences, income levels, and other cultural factors influence demand patterns in the different regions and therefore affect how a company operates in each region. The education and income level of users affects the brand perception of the computer manufacturers. As shown in Figure, households with higher income have higher percentages of Apple computers. Such households are also more likely able to afford (and want) Apple computers. This has allowed Apple to continue its strategy of premium pricing and performance compared to Windows PCs, while at the same time increasing its market share of the total laptop and PC market. At the other end of the education spectrum, new devices such as the rugged and ultraportable OLPC (One Laptop Per Child) have been developed for underprivileged users in developing countries like Africa. Thus, education levels affect both product demand as well as preference. Cultural aspects of different regions affect the occurrence of seasonal sales, which significantly affect the performance of the computer industry as a whole. For instance, in the U.S., the periods from November-December (Thanksgiving / Christmas) and August (back-to-school) are significant earnings period.
Technological advances over the past decade, such as increased processing power with reduced power consumption and reduced cost, or the standardization of Windows and Intel in laptops, are one of the main reasons for the increase in market share of the laptop segment compared to the overall PC industry. For instance, the netbook category’s average selling price (ASP) of $300 was made possible by the low cost Intel Atom microprocessor, released in 2008. New technologies, such as hosted virtual desktops (HVD), threaten to completely change the industry dynamic, due to the possibility of cheaper computers along with lower software costs . HVDs involve centralized computing in which the processing is done on servers instead of individual clients. Gartner, Inc. estimates that the HVD market will grow in revenue from $1.3 billion in 2008 to $65.7 billion in 2013.
The most harmful effect is that Computers release very high amount of CO2. Further environmental problems caused by computers include a large amount of energy consumption during the production of computers as well as by the use of computers. "For the manufacturing of a normal Personal Computer approximately 30'000 megajoule in energy are used." (uns.umnw.ethz.ch). The most dangerous effect is the release of toxic chemicals that are used in the manufacture hardware and in the disposal of computers. In the manufacturing of just one 8 inch wafer 4,267 cubic feet of bulk gases, 27 pounds of chemicals, 29 cubic feet of hazardous gases and 9 pounds of hazardous waste are given off. In addition over 3787 gallons of water are wasted. All the chemicals and toxins that are released often end up polluting ground water and harming peoples health. Even cleaning agents for computer equipment (such as chloroflourocarbons) are bad for the environment - they are extremely harmful to the ozone layer. Computer’s latest technology convenience is using it portable as a Laptop and connection to many networks via wireless and wireless infact are waves. Overall, if we see in the long run people awareness of Environmental effects on computer manufacturing and sales can effect in long run.
Governments legislations and directives can affect the computer prices and sales in many ways.
Porter’s Five Forces Analysis :
Competitive Rivalry from within the Industry
As a matured industry, the Personal Computer’s industry is seeing a price downtrend in the long term, indicating that aggressive pricing will bring more consolidation in the industry to reduce development costs. Many forecasters suggest the concentration ratios for PCs (desktop & laptops) of (70)5 in the future from (50)5, (53)5 and (57.2)5 in 2006, 2007 and 2008 respectively. Due to standardization among Windows PCs, switching costs are low and therefore competition is driven by pricing instead of product differentiation. Apple, on the other hand, competes on product differentiation by promoting premium products rather than low prices.
Bargaining Power of Suppliers
The suppliers for all competitors are quite limited in terms of bargaining power due to increased commoditization of hardware components. Intel and AMD, the two major microprocessor suppliers, compete for increased market share. However, their power is limited due to their need for product promotion among consumers. For hardware such as hard drives (Samsung, Western Digital, Seagate, etc.) or motherboards (Intel, MSI, ASUSTek, etc.) there is very limited bargaining power due to their lack of branding on the finished product. Most manufacturers use different suppliers for the same component, by sourcing their requirements from whoever is cheaper at that time. Thus, if the prices are not competitive, the suppliers risk losing out to their rivals. On the software side, Microsoft dominates with its Windows line of Operating Systems (OS) and therefore exerts considerable power over PC manufacturers.
Bargaining Power of Customers
Customers have large bargaining power over manufacturers, since a major part of the total PC sales is made up of large volume buying from businesses. In addition, consumers also have bargaining power in terms of dictating demand and buying preferences. Consumer preference for mobility and wireless connectivity at low cost resulted in the growth of the laptop market compared to desktops. In addition, continued demand for cheaper costs lead to aggressive pricing as well as the creation of new categories such as netbooks.. In addition, customers’ buying behaviour in developing markets influenced Dell’s decision to sell through retail stores as well.
Threat of New Entrants
Due to aggressive pricing and reducing profit margins, there is a high barrier to entry for new companies. Since large companies are able to invest more in R&D and more easily hire top management talent, there is greater possibility for more innovation in the products. This further increases the barrier to entry for smaller companies. However, ASUSTek’s introduction of netbooks in late 2007 is an example of identifying consumer demand that was not recognized by any of the top industry players and becoming a new competitor. Consequently, ASUSTek had a growth rate of 103% in 2008 since it was the only netbook producer at that time.
Threat of Substitutes
The Personal Computer industry faces a significant threat from new trends such as cloud computing, which potentially will reduce the need for high computing power in portable laptops. Moreover advances in computing power and as well as communication technologies (3G, WiMax, etc.) have enabled devices such as smartphones (iPhone, Blackberry, etc.) to compete with laptops by providing similar capabilities. For instance, iPhone apps somehow reduce the need for laptops by providing similar functionality.
Competitors and Industry Key Factors
The global PC market, is dominated mainly by the five top competitors: Hewlett-Packard (HP), Dell, Acer, Lenovo and Toshiba and together they constitute approximately 60% of the total market share. In the top 10, Apple has been gaining market share compared to Windows PCs and laptops, mainly due to its positive brand reputation. In terms of global PC volume, HP is the leader (18.9%, 2008) followed by Dell (15.5%, 2008). Due to the netbook segment, Taiwanese companies such as ASUSTek and MSI have increased their market share tremendously over the past two years.
In order to remain competitive, all of the top manufacturers share certain characteristics, or key success factors (KSF). Efficient production and distribution capability is one of these key success factors. Due to the reduction in ASPs of Personal Computers, the industry is becoming more commoditized. Therefore the primary means to reduce production costs lies in process improvement from procurement to production and supply chain. This is possible by exploiting the benefits from mass production: more bargaining with suppliers, better global distribution networks, cheaper production facilities in foreign countries, etc. Innovation and the ability to identify consumers’ needs are key success factors as well. Moreover, the effect of these success factors has led to a consolidation in the computer industry, with the largest firms becoming bigger. For instance, the top five firms which represented 50% of the market share in 2007 now account for 60% in 2008.
Based on the key success factor analysis, the weighted competitive strength assessment shows that the future market will be dominated by HP, Dell and Acer. All of the top firms in the table are pretty similar in strength, except for Apple among high prices. The lack of a netbook category, premium pricing, small global share, and different operating system results in Apple having the lowest score. The top Windows Personal Computes have similar scores, due to the commoditization of the industry. In the future, Personal Computes are forecasted to grow to a market share of 30% of the global PC’s industry by 2012. Notebooks have affected the industry in two ways: a price reduction across all laptop categories and a change in consumer preference. Consequently, ASPs for laptops decreased by 6.8% in 2007, 8% in 2008, and is forecasted to decrease by 12% in 2009. In addition, Gartner, Inc. estimates global PC unit growth of 10% but only 4% growth in dollar value for 2009. Thus, the continuing long-term trend of decreasing profits in spite of increased sales volume has forced companies to adjust their business models to maintain profitability. For instance, Acer has announced a new line of personal Computers and thin notebooks to maintain and increase profits in spite of decreased PC demand. Thus, PC manufacturers will continue to have increased growth in the laptop segment, in part due to the international market and netbooks, but will be faced with decreasing profit margins. It is not clear whether the future demand for netbooks is sustainable and therefore, in the long term manufacturers will have to adapt by increasing the focus on the services segment.
However, a number of problems threaten to undermine prospects for sustainable growth. These notably include social tensions, partly due to increasing inequality within society and massive migration to the cities, but also linked to corruption, violence, insufficient public services and rising unemployment as millions of workers have been laid off while agriculture still displays huge structural under-employment.
Economic growth alone will not solve all these problems, improved governance is crucial. If China’s development is to be sustainable, the government needs to undertake a comprehensive programme of far-reaching institutional reforms to define the role of the state, improve management of public spending, and make public action more efficient and effective.
From this essay, you will understand the basic concepts, models and theories affecting economy growth. It also comprehensively seeks to explain on the benefits and cost of economic growth, the technological advancement, international trade, labour migration, capital accumulation, income, education and its social impacts. However, it seeks to explain the advantages and disadvantages of economic growth in China best know for its richness in economy in this century.
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