Business Economics A
(N11604 UK) (AUT 12-13)
“The number of owners of mobile phones has grown rapidly and hence the demand for mobile phones has also grown rapidly. Yet the prices of mobile phones have fallen. Why?” Explain using relevant diagrams.
Student ID: 4192063
In 1973, the first hand-held mobile phone was exhibited by John F. Mitchell. Over the years, from 1990 to 2011, mobile phone subscriptions worldwide raised from 12.4 million to over 6 billion, piercing about 87% of the global population and reaching the base of the economic pyramid. Being one of the most creative innovations, it eventually became the most convenient way of communication. In earlier days, very few people could think of buying a mobile phone but today looking at the dropped prices, almost every individual can afford to own one. Once regarded as luxury is now the thing no human can do without. Everyone, be it a rich businessman or a student doing three part-time jobs to cover his education loan possesses a mobile phone. In today’s generation, mobile phones have become an integral part of people’s lives. They serve as a communication tool used to make and receive calls as well as send text messages, listen to music, surf the internet; to mention just a few reasons for the boosting importance of cell phones.
Mobile phones have made their own single stand and acquired a place in the market that no other product can replace.
The theory of ‘Demand’ refers to how much quantity of a product or service is desired by buyers and how much they are willing to pay for that specific good or service. The quantity demanded of any good is determined by one main determinant which plays a central role – the price of the good. As stated in the Law of Demand, when other factors such as the income of the consumer, price of other goods, etc remain unchanged, the quantity demanded of a good falls when the price of the good rises; and on the other hand, the quantity demanded rises when the price falls. Taking the BlackBerry Bold phone for example; when the price of the phone is 400£, the demand will not be that high but if the price of the phone falls down to 250£, the demand will increase.
PRICE OF THE BLACKBERRY BOLD PHONE (units in £)
QUANTITY OF THE BLACKBERRY BOLD PHONE DEMANDED
The above demand schedule shows the quantity of the BlackBerry Bold demanded at each price. The demand curve below shows how the demand rises with the decrease in price. Because a lower price increases the quantity demanded, the demand curve is sloping downward (negatively sloped).
FIGURE 1: Law of demand applied on BlackBerry Bold phones
In the above figure, with the decrease of price from P to P1, there has been an increase in the quantity demanded from Q to Q1
Increase or decrease in demand of a product is also driven by factors other than price; these cause a shift in the demand curve towards the right (when increasing) or towards the left (when decreasing). There are several variables that cause a shift in the demand curve, such as when the Income of the Consumer increases/decreases, it causes a fall or rise in the quantity of a product demanded. If the demand for a good falls when income falls, the good is called a normal good but if the demand if a good rises with the fall in income, it is known as an inferior good. In cases of mobile phones; an Apple Iphone 5, BlackBerry Bold, Nokia Lumia, etc would be normal goods whereas the cheaper phones of the same companies would be inferior goods. Price of Related Goods also affect the demand. If there are two goods X and Y and the increase in the price of good X leads to an increase in the demand for good Y and vice-versa, they are substitute goods. Whereas if there are two goods X and Y and the increase in price of good X leads to a decrease in the demand of good Y and vice-versa, they are complement goods.