Applications of Demand and Supply

Read this chapter and attempt the "Try It" exercises. This chapter will help you gain familiarity and competencies with regard to basic demand and supply concepts. At a minimum, you should be able to list the factors that shift the demand curve and those that shift the supply curve after completing these chapters. This will help you prepare for similar types of analyses in the units ahead.

4.1 Putting Demand and Supply to Work

The Personal Computer Market

In the 1960s, to speak of computers was to speak of IBM, the dominant maker of large mainframe computers used by business and government agencies. Then between 1976, when Apple Computer introduced its first desktop computer, and 1981, when IBM produced its first personal computers (PCs), the computer usage expanded dramatically. Only 8.2% of U. S. households owned a personal computer in 1984. By 2003, 62% did. After that, the U.S. Census Bureau began asking only about Internet usage. By 2009, more than two-thirds of households had home Internet access. The tools of demand and supply tell the story from an economic perspective.

Technological change has been breathtakingly swift in the computer industry. Because personal computers have changed so dramatically in performance and in the range of the functions they perform, we shall speak of "quality-adjusted" personal computers. The price per unit of quality-adjusted desktop computers fell by about half every 50 months during the period 1976–1989. In the first half of the 1990s, those prices fell by half every 28 months. In the second half of the 1990s, the "halving time" fell to every 24 months. 

There are other indicators of the phenomenal change in computers. Between 1993 and 1998, the Bureau of Labor Statistics estimates that central processing unit (CPU) speed rose 1,263%, system memory increased 1,500%, hard drive capacity soared by 3,700%, and monitor size went up 13%. It seems safe to say that the dizzying pace of change recorded in the 1990s has increased in this century. A "computer" today is not the same good as a "computer" even five years ago. To make them comparable, we must adjust for changes in quality.

Initially, most personal computers were manufactured by Apple or Compaq; both companies were very profitable. The potential for profits attracted IBM and other firms to the industry. Unlike large mainframe computers, personal computer clones turned out to be fairly easy to manufacture. As shown in Table 4.1 "Personal Computer Shipments, Market Percentage Shares by Vendors, World and United States, 2011", the top six personal computer manufacturers produced only 43.3% of the personal computers sold in the world in 2011, and the largest manufacturer, Hewlett-Packard (HP), sold only about 17.5% of the total in that year. This is a far cry from the more than 90% of the mainframe computer market that IBM once held. The market has become far more competitive.

Table 4.1 Personal Computer Shipments, Market Percentage Shares by Vendors, World and United States, 2011

Company Percentage of World Shipments Company Percentage of U.S. Shipments
HP 17.5 HP 26.9
Dell 12.5 Dell 22.6
Lenovo 12.0 Apple 10.7
Acer Group 10.9 Toshiba 9.6
Asus 5.2 Acer Group 9.3
Toshiba 5.2 Others 20.9
Others 36.7    

Figure 4.1 "The Personal Computer Market" illustrates changes that have occurred in the computer market. The horizontal axis shows the quantity of quality-adjusted personal computers. Thus, the quantity axis can be thought of as a unit of computing power. Similarly, the price axis shows the price per unit of computing power. The rapid increase in the number of firms, together with dramatic technological improvements, led to an increase in supply, shifting the supply curve in Figure 4.1 "The Personal Computer Market" to the right from S1 to S2 .

Figure 4.1 The Personal Computer Market

The supply curve for quality-adjusted personal computers shifted markedly to the right, reducing the equilibrium price from P1 to P2 and increasing the equilibrium quantity from Q1 to Q2 in 2011.

Demand also shifted to the right from D1 to D2, as incomes rose and new uses for computers, from e-mail and social networking to Voice over Internet Protocol (VoIP) and Radio Frequency ID (RFID) tags (which allow wireless tracking of commercial shipments via desktop computers), altered the preferences of consumer and business users. Because we observe a fall in equilibrium price and an increase in equilibrium quantity, we conclude that the rightward shift in supply has outweighed the rightward shift in demand. The power of market forces has profoundly affected the way we live and work. One indication of the increasing importance of computers was that in August 2011, Exxon Mobil, an oil company that had been largest company in the United States in terms of the value of its outstanding stock, was the surpassed by Apple Computer Inc., whose value reached $350 billion.