Laptops and the Economy of Scale

The sales in the laptops have been increasing more than 60% per year continuously for the past 4-5 years. In the mean while the cost of the laptops has decreased continuously in the same time period, with even laptops costing below 200 dollars available from branded laptop manufacturers and distributors. This reminds me of the famous and most common principle in economics: The economy of scale.

For those who do not know, “the economy of scale”. The economy of scale is the cost advantages that are obtained due to expansion. Henry Ford was the first to use this strategy in a large scale when he wanted every man to have his own personal car. Now how does it apply for a laptop?

A laptop as we can know consists of various key parts: The Processor, The memory, the mother board and the outer case including the body, keyboards etc. Out of these, the processor primarily manufactured by Intel, the memory and the motherboard are capital intensive whose per unit cost would reduce considerably if the number of units increases. Whereas the other parts will have a significant variable cost component in it and may not decrease so much. Thus with increase in units manufactured, the cost of these components (The processor, the motherboard, the memory) will decrease thus decreasing the cost of the laptop. Perhaps, now you can speculate the reason why you can get netbooks costing below 200 dollars which is branded and good.

This is not the only reason- Remember the Moore’s Law:

Well, the cost of the memory and the processor are reducing by about 30% every year, but economy of scale is not the only reason. The famous Moore’s law states that, the number of transistors per unit area doubles approximately around 2 years. So this may also explain why the prices of the laptops and netbooks are falling.

What Next: How long will this trend in price fall last?

Well, it is difficult to predict how long, will the price fall last. To answer this we have to answer 2 questions. Firstly, how long will the increase in demand last? And secondly: How long will the Moore’s Law last? The answer to the first question depends upon 2 factors: The Asian, The South American and The Eastern and possibly some of the African Economies. If the boom lasts and these countries grow to the full extent then the demand is bound to last for at least 15 years to come. The answer to the second question is a bit difficult to predict. Moore himself had said that, he dint expect his law to hold good for such a long period. And several scientists are already of the opinion that the Law may not last long.

Substitutes for Laptops and Netbooks:

Well, but there may be another problem. In a similar way, the laptops and netbooks have cannibalized the Personal Computer sales. The electronic devices such as Tablet computers can replace a Laptop and netbook. Even though several companies argue otherwise, it is hard to imagine that a few years ahead when the Tablets are more powerful and become a fad. Well, perhaps still there is nothing to worry about, because this is what we customers want, don’t we?

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