Discuss how the stated developments might affect the revenue from the sales of e-books and related products.
Growth in the global economy and the technological advancement have contributed to the ubiquity of e-reading devices and e-books. Many publishers have started to produce e-books in addition to conventional books.
Discuss how the stated developments might affect the revenue from the sales of e-books and related products.[25]
Introduction
There are 3 key events, of which relate to either the theories of demand and supply, stated in the preamble, namely the increase in incomes, improvements in technology and the increase in number of companies producing e-books.
Demand refers to the degree to which a consumer is willing and able to purchase a specific good or service, ceteris paribus. Supply refers to the ability and willingness of a producer to sell goods and services at various price levels, ceteris paribus.
Revenue is given by P x Q (price times quantity).
The market for e-books
Rise in global incomes
1. e-books are normal goods.
2. Higher Incomes -> Higher Demand for e-books
Advances in modern technology
1. Technological advancement -> Faster broadband connections and multiple platforms (e.g. Amazon, Wattpad) -> affected Taste and Preferences -> Higher Demand
2. Technological advancement èCheaper e-books (simple word processing software) -> Lower Cost of Production -> Higher Supply
Increasing number of publishing companies
1. Increase in Supply for e-books
Impact on revenue earned from the sales of e-books
Figure 6a: Market for e-books
Analysis
Given that we know in reality e-books prices has become lower àThe extent that Supply increases (supplemented by affordability of complements such as Amazon’s Kindle) > the extent that Demand increases (e-books are normal goods and traditional paper books still exist). With reference to figure 6a which shows the market from e-books,
Demand shifts rightward to a smaller extent from DD0 to DD1
Supply shifts rightward to a larger extent from SS0 to SS1
Price falls from P0 to P1
Quantity would increase from Q0 to Q1
The impact on revenue is expected to increase as seen in Figure 6a from P0E0Q0 to P1E1Q1.
Impact of changes in the e-book market on markets for related goods
Figure 6b: Market for E-reading devices
Figure 6c: Market for Regular Books
Complements
Joint demand refers to when 2 goods are interdependent.
E-reading devices: generic devices e.g. mobile phones or tablets or specialised devices e.g. Kindle are considered complements to e-books. A fall in price of e-books would result in an increase in demand of complements such as e-reading devices. With reference to figure 6b which shows the market for e-reading devices,
Demand curve shifts from DD0 to DD1
Price increases from P0 to P1
Quantity increases from Q0 to Q1
Both price and quantity increase àRevenue increases from P0E0Q00 to P1E1Q10.
Substitutes
Substitutes refer to goods in which can be considered replacements or alternative choices of each other.
Regular Books are close substitutes to e-books. Lower e-book prices will result in a fall in demand of regular books. With reference to figure 6c, which shows the market for regular books
Demand curve shifts from DD0 to DD1
Price decreases from P0 to P1
Quantity decreases from Q0 to Q1
Both price and quantity decrease àRevenue decreases from P0E0Q00 to P1E1Q10
· Possible closure of stores e.g. Borders
Conclusion
The mentioned developments would likely bring about a significant change in the revenue earned from the sale of e-books. The overall revenue of individual firms would be deemed to fall, given that the rise in the number of firms would nullify the rise in demand. Also, as the consumption of the complements of e-books rise, individuals must still have an inclination to reading before the consumption of e-books would increase. Furthermore, readers with specific tastes and preferences of holding a physical copy of a book when they read may not be pleased by e-books.
(RWA) The theoretical discussion has yielded an expectation of a fall in revenue for regular books, which is consistent with book store closures all over the world, like Borders in Singapore. Likewise, e-book readers such as Kindles and tablet computers are seeing an increase in its prevalence and would have likely been seeing an increase in revenue. Thus our expectations of the 2 mentioned markets are consistent with our discussion.
Comments
Students are advised to read deeply into the question to understand key points such as “developments”. There needs to also be a discussion of the “related products” – both substitutes and complements are required.