(2015) H2 Econs Paper 2 Question 2 Suggested Answer
Recent years have seen a dramatic rise in the output of computer-based products such as smartphones, laptops and tablets.
Discuss the demand and supply factors that determine the output of computer-based products and evaluate which is the most important factor. [25]
Introduction
Computer-based products include smartphones, laptops and tablets.
The increase in output of computer-based products will be due to both factors affecting demand and supply.
Specifically, an increase in demand and an increase in supply would lead to an increase in output of computer-based products.
Demand factors
1. Changes in tastes and preferences
Increase in broadband speeds and availability of mobile broadband networks globally has led to increase ease and convenience in the use of computer-based products and that has led to wide-spread adoption of such devices
2. Increase in income levels of consumers
An increase in income levels of consumers in developing countries such as China and India have led to an increase in demand for consumer goods such as smartphones, laptops and tablets
Both of these factors would have led to an increase in demand for computer-based products which will shift demand from DD0 to DD1 as seen in Figure 1 below, which will lead to an increase in output from Q0 to Q1.
Supply factors
1. Fall in cost of factor inputs
The relocation of production plants from developed countries to lower cost developing countries allows firms to benefit from lower labour costs à fall in cost of production àincreases supply
2. Technology
Technological advancements has brought down the cost of microchips used in computer-based products à fall in cost of production à increases supply
Both of these factors will lead to an increase in supply for computer-based products which will shift supply from SS0 to SS1 as seen in Figure 2 below, which will lead to an increase in output from Q0 to Q1.
Cumulative effect of increase in demand & supply on the output of computer-based products
The increase in output (from Q0 to Q1) of computer-based products is a culmination of the impacts of both an increase in demand (from DD0 to DD1) and supply (from SS0 to SS1) as shown in Figure 3 below.
Evaluating the importance of each individual factors
Why changes in tastes and preferences could be the most important factor
The supply for computer-based products are likely to be price elastic. This is given the case that computer-based products are manufactured products which are usually produced in a factory production line.
When supply is price elastic, any increase in demand leading to an increase in price will result in a more than proportionate increase in quantity supplied.
As seen in the figure below, if supply was price elastic, the increase in quantity will be from Q0 to Q1 while if supply was price inelastic the impact from the increase in demand will be from Q0 to Qi.
This means that changes in tastes and preferences could be an important factor as well.
Why increase in income levels could be the most important factor
Computer-based products like smartphones, tablets and laptops are considered to be luxury goods. The demand for luxury goods is income elastic.
This means that given any increase in incomes – demand will increase more than proportionately.
Considering this and the increase in global incomes in recent years, this would likely mean that the increase in income levels could be considered to be the most important factor.
Why changes in technology and input costs could be the most important factor
Given that demand for computer-based products would likely be price elastic given that there are many substitutes available for such products (desktops in lieu of laptops), and they usually take up a large proportion of income (a smartphone can easily cost upwards of $1000 these days).
Any fall in price due to the increase in supply (which is a result of the technological changes and fall in input costs) will lead to a more than proportionately increase in quantity demanded from Q0 to Q1.
This is in comparison with the smaller increase from Q0 to Qi if demand was price inelastic instead.
Conclusion
All the factors that we have stated were all individually important towards contributing to an increase in output for computer-based products.
Amongst these factors, however, if we were to identify the one single most important factor, it would likely be due to the rise in incomes.
This is considering the fact that computer-based products such as laptops, smartphones and tablets have grown to become increasingly more luxury in nature given the specifications and pricing for such goods.
The rise of the middle-income class in countries like China & India would have attributed significantly to an increase in demand for such goods.
In addition, global incomes has also been increasing, contributing to increase in demand for such goods.
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