Question

Another DVD Format, but It's Cheaper New Medium Enterprises claims that its new system, HD VMD, is equal to Blu-ray's but at \(\$ 199\) it's cheaper than the \(\$ 300\) Blu-ray player. The Blu-ray Disc Association says New Medium will fail because it believes that Blu-ray technology will always be more expensive. But mass production will cut the cost of a Blu-ray player to \(\$ 90\). Source: The New York Times, March 10,2008 a. Explain how technological change in Blu-ray production might support the prediction of lower prices in the long run. Illustrate your explanation with a graph. b. Even if Blu-ray prices do drop to \(\$ 90\) in the long run, why might the HD VMD still end up being less expensive at that time?

Short answer

Technological change lowers Blu-ray production costs, leading to a price drop. HD VMD might still be cheaper if it benefits from similar improvements or has a cost-effective production method.

Step-by-step solution

- Explain the impact of technological change on Blu-ray production

Technological change can lead to increased efficiency in production processes. This means that the same number of Blu-ray players can be produced using fewer resources or the same resources can produce more units. This increased efficiency typically results in lower production costs, which can contribute to a decrease in the market price of Blu-ray players over time.

- Illustrate the effect of technological change with a graph

Draw a supply and demand graph for Blu-ray players. Initially, the equilibrium price is at \$ 300\$$. Represent the initial supply curve as S1. Technological change increases supply, shifting the supply curve to the right (denote it as S2). Consequently, the new equilibrium price decreases to \$ 90\$$. The demand curve (D) remains unchanged and indicates how the market adjusts to a new equilibrium price as supply increases.

- Discuss why HD VMD might still be less expensive

Even if the price of Blu-ray players drops to \$ 90\$$ due to technological advancements, HD VMD might still be less expensive. This could be due to several factors: (1) HD VMD technology might benefit from similar technological improvements, further reducing its costs; (2) Market competition could drive prices lower across the board; (3) HD VMD might employ a simpler or more cost-effective production method than Blu-ray, leading to sustained lower prices.

Key concepts

technological efficiency

Technological efficiency refers to the ability to produce the maximum output with the least amount of input. In the context of Blu-ray production, technological change means finding better techniques or machinery that allow manufacturers to make Blu-ray players more quickly and cheaply.
For instance, innovations such as automation, improved material handling, or more efficient assembly processes can all lead to higher productivity. This results in lower production costs because the same resources can produce more Blu-ray players.
The result? Lower market prices. When companies can produce more for less, they can afford to sell their products at a lower price while still making a profit. Consequently, consumers benefit from reduced prices on Blu-ray players over time.

production costs

Production costs are the total expenses incurred when manufacturing a product. These include labor, materials, and overhead costs. When technological innovations are introduced, they can significantly reduce these costs.
Lower production costs mean that companies can lower the price of their product while maintaining their profit margins. For Blu-ray players, technological improvements such as better production lines can make manufacturing faster and cheaper.
These cost savings are often passed on to the consumer. For example, if a company finds a way to build a Blu-ray player for \(90 instead of \)300, they can sell it at a lower price and still make money. This is especially important in competitive markets where lower prices can attract more customers.

equilibrium price

The equilibrium price is the price at which the quantity of a product demanded by consumers equals the quantity supplied by producers. It's the 'sweet spot' where the market is balanced.
In the case of Blu-ray players, technological improvements can increase the supply of players by making production more efficient. This shift is represented by a movement of the supply curve to the right.
With a higher supply and steady demand, the new equilibrium price will be lower. Initially, if Blu-ray players cost \(300, increased supply from technological efficiency might lower the equilibrium price to \)90.
Consumers benefit from this new lower price because the market has adjusted to the improved supply conditions.

supply and demand

Supply and demand are fundamental economic concepts that determine the price of goods in a market. Supply refers to how much of a product is available, while demand refers to how much of the product consumers want to buy.
For Blu-ray players, technological advances can increase supply because manufacturers can produce more units at a lower cost. On the other hand, demand might remain stable or even increase as prices drop.
Still, even if Blu-ray prices fall to $90 due to technological advancements, HD VMD could remain cheaper for several reasons.

• HD VMD might also leverage new technologies to reduce its own production costs.
• Market competition could further drive down prices for both product types.
• HD VMD might have a simpler, more cost-effective production process.

This dynamic interplay of supply and demand ensures that consumers have access to products at fair prices.