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PC Price Cuts
Subject Demand
Topic Supply and Demand
Key Words Sales, Recovery, Recession, Price, Rebates, Demand, Budgets, Consumers
News Story

Personal computer sales are showing signs of a recovery. They had declined during the holiday season of 2000, and worsened as the recession continued and the September 11 attacks occurred. But, since Thanksgiving 2001, a mild surge has been evident in stores, on the Web sites, and through direct sales. Hewlett-Packard reports a 20 percent increase in sales over Thanksgiving.

Sales are rising in large part because of steep price discounts and rebates. Dell has been the leader in price cuts, aiming to prompt consumers to buy faster computers or add more machines. Another tactic has been to reduce the price of other electronic products, such as digital cameras, color printers, and scanners, when bought with a new home computer.

The increase in computer sales has occurred in spite of the significant growth in sales of home entertainment systems and devices such as DVD players, surround-sound audio systems, and wide-screen televisions, encouraged by large price cuts and a trend toward staying at home instead of going out for entertainment.

However, computer demand is unlikely to rebound on a sustained basis until businesses restore their technology budgets and applications require faster machines. It is also expected that when prices rebound, demand will slump again. Consumers are likely to wait for good deals to appear again.

(Updated January 15, 2002)

Questions
1. Draw a diagram with axes showing the price and quantity of personal computers. Add a demand curve.
a) The news story indicates that the computer market was initially hurt by the recession. Which determinant of demand was affected? Illustrate the implications of the recession for the demand curve and the quantity at a given price.
b) Home entertainment systems and devices also came down in price. Which determinant of the demand for computers was affected? Show how the demand curve for computers was affected. What happened to the quantity of computers assuming that the price was held constant?
2. Draw a second diagram of the demand for computers.
a) Computer suppliers responded by offering price discounts on new computers. Which determinant of demand changed? Illustrate what happened on your diagram.
b) Suppliers also charged consumers less for related goods such as printers, scanners, and digital cameras. Which determinant of demand was affected? Show how the demand curve for computers changed, and what happened to the quantity at a given price.
3. Now draw a third diagram of the demand for computers.
a) The price discounts will be reversed at some point. Show what will happen in terms of your diagram.
b) If consumers expect lower prices at some future point, what will happen to their demand now? Illustrate, showing the change in quantity at a particular price. Which determinant of demand has changed?
Source New York Times, "Computer sales brighten a bit," St. Petersburg Times, December 10, 2001.

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