Unit 3 Micro: Revision on Scale Economies, Technology and Prices

Why do the prices of flat screen televisions keep falling, despite increasing demand?

This question reminds me of the classic joke…

My local TV shop is selling a 42 inch plasma tv screen for £10, stuck on full volume ..... you can’t turn that down!

Why do the prices of flat screen televisions keep falling, despite increasing demand?

This question invites aome analysis of the combined effects of technological change, the market effects of economies of scale and increasing trade and competition in international markets

Ceteris paribus, rising demand should raise market prices but the industry for high tech TV screens is one where supply-side changes have a greater impact on prices than the level of effective demand.

1/ Internal economies of scale - as the industry grows, producers can exploit economies of scale which drives down the unit price. Internal economies cause a movement down the long-run average cost curve. External economies of scale will bring about a downward shift in long run unit costs for each level of output. Improvements in unit costs arising from the accumulation of industry experience (so-called learning economies) have a similar effect.

2/ Industry-wide technological advances - improved production processes offer an opportunity for TV screen manufacturers to produce faster, at lower cost or better quality.

3/ The entry of new producers into the market perhaps resulting from opening up a market to international competition will lead to an outward shift of market supply. Intense competition between tv retailers will also keep prices down especially when there is a slowdown in market demand leading to a rise in unsold TV screen inventories.

These factors combined help to explain why the consumer price index for audio-visual equipment including television screens falls nearly every year - price deflation brought about by significant supply-side improvements in productive and dynamic efficiency. This is shown in the chart below.

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