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The Fall and Rise of PC Prices
Subject Comparative statics
Topic Equilibrium
Key Words Prices, suppliers, export, production, competition, market, consumers
News Story

PC prices have fallen for a number of years, but have now risen slightly to about $1,000. They may increase further as students return to school and the holiday season approaches.

There are three factors at work. First, components, such as computer memory chips, microprocessors, and liquid crystal display screens, are becoming more expensive as they are being used in more and more electronic devices, such as cell phones, digital assistants, and digital cameras. It will be next year before foreign suppliers have the capability to export production to the U.S.

Second, there is less competition among PC makers. IBM and Acer now only sell through their web sites. Packard Bell closed its consumer division. Compaq, Hewlett-Packard, and eMachines now supply 83 percent of the home computer market. hird, increasingly, consumers want components such as recordable CD drives and DVD drives. Such features add to the price of the computer.

(Updated September 1, 2000)

Questions

1. Draw a supply and demand diagram of the market for computer components. Mark the initial equilibrium price and quantity.

a) Show the effect on the equilibrium of the growth in devices using computer components.
b) When foreign producers export components to the U.S., how will the equilibrium alter? Illustrate your answer.

2. Draw a diagram showing the supply of and demand for computers. Show the equilibrium price and quantity.

a) Show the effect on the equilibrium of the change in price of components in 1(a) above.
b) The number of computer producers has declined. How has this affected the equilibrium? Depict your answer on your diagram.
c) How do additional features such as DVD drives affect the equilibrium price and quantity? Illustrate on your diagram.
Source Michelle Kessler, "PC prices poised to climb for school, holiday sales," USA Today, July 7, 2000.

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