Introduction
Although new technologies and devices are released every year, there are certain products, like flat-screen TVs, that remain popular among customers. In the past few years, prices for flat-screen TVs have been falling. The supply and demand framework is a valuable tool that is commonly used to determine prices for the majority of products and services and observe general market trends. The framework consists of several important laws, assumptions, and concepts that must be explored in order to apply the supply and demand framework correctly. The present paper will use the supply and demand framework to analyse the flat-screen TV market and explain the on-going price drop for this type of products.
Flat-Screen TV Market
The flat-screen TV market is among the most prominent markets in electronics. People from all over the global watch TV on a daily basis to gain access to the latest news, popular films and TV shows. Flat-screen TVs are particularly popular because they take up less space, are more stylish, and offer a better video quality than the older types of TVs. According to a recent report, the demand for flat panel technologies, including flat-screen TVs, has been on the rise in 2017 (Flat panel demand to grow 7.2% in 2018 2017).
This is particularly due to the shift from analogue to digital television technology and the rising popularity of on-demand television and video viewing platforms, such as Netflix. Another reason for the consistent popularity of flat-screen TVs is technological development. For example, Cho and Daim (2016) forecast that the new OLED TVs will contribute to market growth as they increase in popularity.
Another trend is that new technologies allow the latest flat-screen TV models to be more energy efficient, thus reaching environmentally and financially conscious consumers (Park et al. 2013). Despite the popularity of flat-screen TVs, many local markets experienced significant price drops in the last few years. For example, Mukherjee (2018) reports that Samsung slashed its TV prices by 20% in the first half of 2018. In order to understand these price changes, it is essential to explore how the supply and demand framework applies to the flat-screen TV market.
Applying the Supply and Demand Framework
Key Premises
The supply and demand framework includes two fundamental premises. First of all, it is critical to define the competitive market, as it is understood in the framework. As explained by Arnold (2015), a perfectly competitive market is the one where there are a lot of suppliers and buyers, and where individual suppliers or buyers do not influence the overall market trends. The television market is an excellent example of a competitive market, as TVs are a popular product, and there are a lot of different producers offering flat-screen TVs. Secondly, there are laws of supply and demand which describe the relationships between supply, demand, and product prices.
The law of demand holds that, if all other things remain unchanged, “a higher price leads to a reduction in quantity demanded and a lower price leads to an increase in quantity demanded” (Principles of economics 2016, p. 72). The law of supply, on the other hand, states that an increase in the price of a particular product or service results in an increase in quantity supplied (Principles of economics 2016). Thus, the supply has a positive correlation with price, whereas the demand has a negative relationship with price.
Market Equilibrium
The third key concept in the supply and demand framework is market equilibrium. According to Arnold (2015), a market is considered to be in equilibrium when the quantity of a product at a specific price demanded by customers equals the quantity that the suppliers are ready to provide at the same price. Disruptions and changes in the market cause shifts in supply and demand, and thus the market is no longer in equilibrium. To regain market stability, suppliers will usually change prices until the supply meets the demand at an equilibrium price (Principles of economics 2016). This is a trend that could be used to explain price changes in the flat-screen TV market.
Both supply and demand for flat-screen TVs are affected by several factors, but technological development has a fundamental influence. On the one hand, it influences the supply of flat-screen TVs by reducing production costs.
As new technologies are developed, operations are enhanced to reduce the costs of their production. Flat-screen TVs with an OLED display are a great example of this trend. IHS Markit (2017) reports that the cost of producing a 55-inch OLED TV panel decreased by 55% between 2015 and 2017, thus improving manufacturing efficiency. With reduced production costs, suppliers are able to offer more products at the same price, thus shifting the supply curve.
On the other hand, technological development also increases the threat of substitute products and services. The increasing popularity of laptops and tablets, as well as large-screen computers, threatens the TV market because customers gained the opportunity to watch films, news, and TV shows on other devices. This affects the demand curve, as fewer customers are willing to buy new flat-screen TVs at a high price. The changes to the supply and demand caused an imbalance in the market, thus shifting the equilibrium to a lower price point and causing a decrease in prices for flat-screen TVs. At a lower price point, customers will be willing to buy more flat-screen TVs, and the suppliers will be willing to meet the demand due to reduced production costs.
The Elasticity of Supply and Demand
Another concept in the demand and supply framework that is used to understand price changes in the flat-screen TV market is elasticity. There are various types of elasticity in the supply and demand framework, including price elasticity, income elasticity, and cross-price elasticity. Elasticity reflects the level to which a change in one variable is the reason for change in the other variable (Principles of economics 2016).
Thus, the income elasticity of demand shows the extent to which a change in customers’ income results in a shift in demand for products. Cross price elasticity of demand reflects the responsiveness of demand for one product to a change in price for another product, typically a substitute (Arnold 2015). Price elasticity of demand or supply reflects the responsiveness of demand or supply to price changes.
There are two important determinants of price elasticity of demand. The availability of substitute products is critical, as it can influence customers’ purchase decisions (Principles of economics 2016). For instance, if a product price decreases and the substitute products are expensive, the demand for a product can apparently rise substantially due to the change in price, and thus the demand is price elastic.
A second determinant is the importance of a particular product in the household budgets (Principles of economics 2016). If a product is expensive and occupies a significant share of the budget, the decrease in price will trigger a considerable increase in demand. The demand for flat-screen TVs is price elastic, as the available substitutes are generally expensive and purchasing a new TV is a substantial expenditure.
Price elasticity of supply is determined mainly based on the suppliers’ production capacity. If the supplier can offer a larger quantity of a product at the same price, the supply is said to be price elastic (Principles of economics 2016). Production efficiency plays a crucial role in this relationship, as it enables manufacturers to increase output without increasing the overall production costs. Flat-screen TVs are produced by manufacturers with high production capacity. Additionally, the costs of production reduce over time, as shown by IHS Markit (2017). Therefore, the supply of flat-screen TVs is price elastic.
Applying the concept of price elasticity to the flat-screen TV market shows two trends. First, the demand is highly sensitive to price changes, and respectively a decrease in the prices of flat-screen TVs leads to increased demand. Second, most producers of flat-screen TVs are capable of supplying a higher quantity of products at lower prices. Therefore, the decrease in prices could also represent the suppliers’ efforts to boost the demand for flat-screen TVs. These efforts are justified, as there are various forces threatening the demand for TVs today.
As explained above, the threat of substitute products is high, and thus reducing the price of flat-screen TVs could increase the customers’ willingness to buy them in addition to a tablet or a laptop. Moreover, the service life of most flat-screen TVs is high, and thus people do not need to purchase them regularly. Although suppliers introduce new technologies and models to attract customers to buy TVs more frequently, it is also critical to ensure that new models are affordable.
Demographic shifts also affect the demand for flat-screen TVs. The younger generation of consumers does not watch TV as much as their parents used to do. Richter (2018) reports that TV viewing has a negative correlation with age: whereas older adults view on average about 7.5 hours of television daily, younger adults aged 18-34 consume less than 2.5 hours of television on average. As the younger consumers represent a growing share of the electronics market, it is critical for suppliers to respond to the shifts in demand by reducing prices.
Conclusion
All in all, applying the supply and demand framework to the flat-screen TV market provides two possible explanations for the continuing price reduction. It could be that as a result of technological advancements triggering changes in demand and supply, the market is heading towards a new equilibrium at a lower price point. It is also plausible that the suppliers are responding to market threats by lowering prices in an attempt to capitalise on the price elasticity of supply and demand in the market. Based on the analysis, it is anticipated that the price drop will stop as soon as the market equilibrium is reached or when the price elasticity of supply becomes lower due to limited production capability.
Reference List
Arnold, RA 2015, Microeconomics, 12th edn, Cengage Learning, Boston, MA.
Cho, Y & Daim, T 2016, ‘OLED TV technology forecasting using technology mining and the Fisher-Pry diffusion model’, Foresight, vol. 18, no. 2, pp. 117-137.
IHS Markit 2017, Costs of 55-inch OLED TV display production catch up to LCD TV panels, IHS Markit says. Web.
Mukherjee, W 2018, ‘Samsung slashes TV prices by up to 20% for keeping dragon at bay’, The Economic Times. Web.
Park, WY, Phadke, A, Shah, N & Letschert, V 2013, ‘Efficiency improvement opportunities in TVs: implications for market transformation programs’, Energy Policy, vol. 59, no. 1, pp. 361-372.
Principles of economics 2016, University of Minnesota Libraries Publishing, Minneapolis, MN.
Richter, F 2018, The generation gap in TV consumption. Web.
Flat panel demand to grow 7.2% in 2018. 2017. Web.