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Competing products

4 January, 2016 - 16:23

If competing products improve in quality or fall in price, a supplier may be forced to follow suit. For example, Hewlett-Packard and Dell are constantly watching each other’s pricing policies. If Dell brings out a new generation of computers at a lower price, Hewlett-Packard will likely lower its prices in turn—which is to say that Hewlett-Packard’s supply curve will shift downward. Likewise, Samsung and Apple each responds to the other’s pricing and technology behaviours.

These are some of the many factors that influence the position of the supply curve in a given market.

Application Box: The price of light

Technological developments have had a staggering impact on many price declines. Professor William Nordhaus of Yale University is an expert on measuring technological change. He has examined the trend in the real price of lighting. Originally, light was provided by whale oil and gas lamps and these sources of lumens (the scientific measure of the amount of light produced) were costly. In his research, Professor Nordhaus pieced together evidence on the actual historic cost of light produced at various times, going all the way back to 1800. He found that light in 1800 cost about 100 times more than in 1900, and light in the year 2000 was a fraction of its cost in 1900. A rough calculation suggests that light was five hundred times more expensive at the start of this 200-year period than at the end.

In terms of supply and demand analysis, light has been subject to very substantial downward supply shifts. Despite the long-term growth in demand, the technologically-induced supply changes have been the dominant factor in its price determination.

For further information, visit Professor Nordhaus’s Web site in the Department of Economics at Yale University.