Help with a Q. please

K4t

“Technological improvements have led to an enormous drop in the cost of producing mobile phones. This has led the price of phones to drop, which has, in turn, led to a huge increase in demand. The manufacturers have been able to take advantage of this increase in demand to avoid dropping their prices as much as they could have.”
Is this statement true and why? I'm lost....

nesf

I won't answer the question buy I'll restate it to make what's being asked more obvious.

Initially high prices restricted demand. With technological changes (and importantly a cheap high tech manufacturing industry in Asia eager for outsourcing) prices could be dropped substantially. This stimulated demand.

What the premise is that the demand curve for mobile phones doesn't look like your typical textbook demand curve and that the market gets saturated at a particular price point (i.e. a very high % of phones are sold per head of population at this price point). Going below this price point doesn't get you many more sales so phone companies can keep the price around this level while further technological process makes the phones cheaper to make meaning that phone companies can increase their profit margin while maintaining a high level of demand.


In reality it is far more complex than this because phones are not a simple product and aren't homogeneous and can't be described by a simple demand curve.

Senna

Are you talking about phone manufacturers (nokia, LG) or phone companies (O2, Vodaphone) not reducing prices?

smcgiff

''This has led the price of phones to drop, which has, in turn, led to a huge increase in demand. The manufacturers have been able to take advantage of this increase in demand to avoid dropping their prices as much as they could have.''

Prices have reduced and enticed more people to buy. But the manufacturers believe a price point was reached where customers would buy and did not need to reduce the price further.

It suggests that if the manufacturers reduced the price below current levels sales would not increase, as those intending to buy would have already bought.

Therefore the company achieves a profit maximising position by keeping the sales price as high as it currently is.

You should draw out the supply and demand curves.
Do it in paint even and post them up here if you want. If you get it right, its very east to understand.

thee glitz

nesf wrote: »

Initially high prices restricted demand.

Careful here, the demand curve / schedule shows how many units customers
would buy, given different prices.

With technological changes (and importantly a cheap high tech manufacturing industry in Asia eager for outsourcing) prices could be dropped substantially. This stimulated demand.

People's tastes and income affect demand. Production costs don't.
Any change in equilibrium quantity will result from a shift in Supply.

nesf

thee glitz wrote: »

Careful here, the demand curve / schedule shows how many units customers
would buy, given different prices.


People's tastes and income affect demand. Production costs don't.
Any change in equilibrium quantity will result from a shift in Supply.

Demand = Total expenditure on a particular good.

A drop in price stimulates demand by increasing expenditure on a particular good. The demand curve is a different thing to demand itself since it shows the relationship between price and demand but it is not demand itself. Production costs can affect price which can affect demand, they don't affect the demand curve itself which is a different statement. To say something stimulated demand simply states that total expenditure/units sold increased, it does not necessarily make any statement on the equilibrium in a Demand/Supply graph unless or the positions and shapes of the Supply and Demand Curves unless otherwise specified. Also bear in mind that I wasn't answering the question for the student, just restating the question, it was up to them to figure out why demand had changed which is where you'd want to start talking about shifts in the Supply curve etc.

thee glitz

Are you talking about hicksian demand nesf?

nesf

thee glitz wrote: »

Are you talking about hicksian demand nesf?

No, I'm talking of demand as a simple concept as defined by the MIT Dictionary of Economics (i.e. the definition I gave). If I was talking about hicksian demand I'd have said hicksian demand.

thee glitz

nesf wrote: »

Demand = Total expenditure on a particular good.

Not true! Demand is the measure of a consumer's willingness (and ability)
to pay for a good. I know you know this!

nesf

thee glitz wrote: »

Not true! Demand is the measure of a consumer's willingness (and ability)
to pay for a good. I know you know this!

There's more than one definition of demand mate. It isn't just a micro concept!

thee glitz

nesf wrote: »

There's more than one definition of demand mate. It isn't just a micro concept!

True, but this is a micro problem. I just think your response above could be confusing here.

nesf

thee glitz wrote: »

True, but this is a micro problem. I just think your response above could be confusing here.

Yeah but look at the phrasing in the question. Demand means total expenditure not preferences etc.

thee glitz

Here's my take on it.

nesf wrote: »

Demand = Total expenditure on a particular good.

The demand curve is a different thing to demand itself since it shows the relationship between price and demand but it is not demand itself.

=> The demand curve shows the relationship between price and total expenditure on a good?

Expenditure (revenue) can be calculated from the demand curve as the rectangular area from
(0,0) to any point on the demand curve but it's a total revenue curve which shows the relationship
between price (but usually quantity) and expenditure (revenue is the more common term).

A drop in price stimulates demand.

No. The demand curve shows a relationship between price and quantity so a change in price can't move it.

Production costs can affect price (true) which can affect demand (not true, see above), they don't affect
the demand curve itself which is a different statement. (demand≠ demand curve?)

To say something stimulated demand simply states that total expenditure/units sold increased, it does not necessarily make any statement on the equilibrium in a Demand/Supply graph unless or the positions and shapes of the Supply and Demand Curves unless otherwise specified.

If units sold increased, that is making a statement about the equilibrium S/D (ceteris paribus).

Also bear in mind that I wasn't answering the question for the student, just restating the question, it was up to them to figure out why demand had changed which is where you'd want to start talking about shifts in the Supply curve etc.

should read:
it was up to them to figure out why quantity demanded had changed which is where you'd want to start talking about shifts in the Supply curve etc.

nesf

Sure, but your definition is at odds with the phrasing in the question:

i.e.

"This has led the price of phones to drop, which has, in turn, led to a huge increase in demand."


We're really splitting hairs here btw.

nesf

thee glitz wrote: »

Here's my take on it.



=> The demand curve shows the relationship between price and total expenditure on a good?

Expenditure (revenue) can be calculated from the demand curve as the rectangular area from
(0,0) to any point on the demand curve but it's a total revenue curve which shows the relationship
between price (but usually quantity) and expenditure (revenue is the more common term).



No. The demand curve shows a relationship between price and quantity so a change in price can't move it.



If units sold increased, that is making a statement about the equilibrium S/D (ceteris paribus).





should read:
it was up to them to figure out why quantity demanded had changed which is where you'd want to start talking about shifts in the Supply curve etc.

Think about what you're doing here. What I said follows from the definition I was using. Inserting a different definition in there and showing how there are problems with is a tautology!

thee glitz

nesf wrote: »

Sure, but your definition is at odds with the phrasing in the question:

i.e.

"This has led the price of phones to drop, which has, in turn, led to a huge increase in demand."


We're really splitting hairs here btw.

We are ye
Btw the question is 'Is this statement true and why?'
Any more of this and ther'll be nothing left for k4t to do!

nesf

thee glitz wrote: »

We are ye
Btw the question is 'Is this statement true and why?'

I look at it and just see one big "you can't apply the standard microeconomic framework because we've got an oligopoly" label on it but I don't think that was the question that was being asked.

thee glitz wrote: »

Any more of this and ther'll be nothing left for k4t to do!

And there I was trying my best not to answer the question in my reply..

thee glitz

nesf wrote: »

And there I was trying my best not to answer the question in my reply..

I didn't see anything in the charter but i presume it's not cool to do all the work.
Just wondering who the lecturer is K4t?

The question doesn't say anything about market structure but i reckon you can
assume pc. You seem to be overthinking this a bit - it's ec101/201

Time Magazine

thee glitz wrote: »

I didn't see anything in the charter but i presume it's not cool to do all the work.

Charter schmarter, this isn't AH. Use your common sense

nesf

thee glitz wrote: »

I didn't see anything in the charter but i presume it's not cool to do all the work.
Just wondering who the lecturer is K4t?

The question doesn't say anything about market structure but i reckon you can
assume pc. You seem to be overthinking this a bit - it's ec101/201

But it's fun to overthink it! I was going to challenge you on why you assume the market will reach equilibrium and whether you'd accept the market could always be out of equilibrium but figured it might be a bridge too far for the undergrads reading this...

thee glitz

nesf wrote: »

But it's fun to overthink it! I was going to challenge you on why you assume the market will reach equilibrium and whether you'd accept the market could always be out of equilibrium but figured it might be a bridge too far for the undergrads reading this...

It can be fun but I think you've just scared them away from any postgrad study there

I'm assuming the market reaches the new equilibrium (like in the pretty diagram above) as I'm up cruelly
early in the morning and don't need to be up all night developing a phone producer-mobile provider-customer
model in my head The market could always be out of equilibrium, forever moving towards a new one with
changes in costs and, my fav, imperfect info. How dyo like that!

Économiste Monétaire

I think nesf is about to break out the ODEs and phase diagrams :pac:

thee glitz

Économiste Monétaire wrote: »

I think nesf is about to break out the ODEs and phase diagrams :pac:

been gone a while alright and my head hurts enough already.

nesf

Économiste Monétaire wrote: »

I think nesf is about to break out the ODEs and phase diagrams :pac:

Hush now, I wouldn't dare use something so overly simplistic as a phase diagram to model such!

nesf

thee glitz wrote: »

I'm assuming the market reaches the new equilibrium (like in the pretty diagram above) as I'm up cruelly
early in the morning and don't need to be up all night developing a phone producer-mobile provider-customer
model in my head The market could always be out of equilibrium, forever moving towards a new one with
changes in costs and, my fav, imperfect info. How dyo like that!

Interesting factors to consider:

New phones tend to have "innovations".
Phones will behave a bit like durable goods for some consumers but not for others (some change phones for features, some only buy phones when their old one breaks).
Prices change depending on whether upgrades are available, consumers are willing to switch networks and so on. Also due to different service delivery models there are two prices for most phones (one pre-paid, one bill).
Bill phones lock in consumers for a certain period, pre-paid phones don't. Will this cause different dynamics in the two consumer groups and do people move between them and in what direction?

I'd go on, but you get the idea. Loads of interesting dynamics going on here to make a static equilibrium model look a bit stale.

Time Magazine

nesf wrote: »

Hush now, I wouldn't dare use something so overly simplistic as a phase diagram to model such!

Ah, the good old "let's turn an ECON101 question into a debate about the sign of the second derivative at the equilibrium" movement. Like a legion of dark horsemen, their appearance usually spells the end of a thread.

OP, hopefully the first few replies will help you answer your question. The latter half of this thread should serve as a warning to you of what's ahead in graduate economics :pac:

Please PM me if you need more help and I'll re-open this thread.