1 September 2016

Has technology made mainstream microeconomics redundant?

By Callie Lau

Mainstream economics encompasses the fields of philosophy, psychology, and mathematics that attempt to quantify evidence for scientific tests and analysis. Theories are tested repeatedly over a long period to examine if they hold true. Today, most basic microeconomics classes teach how consumers make decisions based on the information available to them. This includes demographics, such as age and income, as well as the prices of products.

In mainstream microeconomics theories the price of a product is the only factor compared, for example, product X is analysed with related products. However, it is often found that there are many other factors such as the reputation of a brand and after sales service available, which are equally important to consumers, and which influence buying decisions. As a result, the substitution of products takes place not only when prices change but also when non-price factors change. However, mainstream economics analysis often requires the assumption that only one factor changes while others remain constant.

In the economies where the theories are postulated, the market is simple: goods are either agricultural products or manufactured ones with simple technology. The products are continuous in nature, that is, the quantity of goods consumed can be measured in 2.5kg or 1.25m. Under a set of assumptions, mainly maximizing satisfaction and the availability of information, the microeconomic models can be expressed in mathematical equations to determine the amount of goods consumed if the general consumer behaviour and a set of consumer characteristics are given. For example, if a consumer with a certain number of children, earns a certain income and has all available information seeks to maximize satisfaction, will consume Y kg of chicken at a given market price. When his income increases by X amount, then chicken consumption may increase by 0.5 kg.

Today, many goods and services consumed are influenced by technology, from the production to consumption stages. Technology contributes to reduced production cost, causing the real price of innovative products to become more affordable and therefore more accessible over time. As technology evolves and as society becomes more affluent, consumption patterns also see a shift. This can be in the form of quality and physical quantity. Many goods consumed are discrete in nature, that is, the amount of the goods consumed is expressed in round numbers, for instance a household owns two cars but not two-and-a-half cars.

As early as the 1960s, economists began to propose product characteristics as an essential factor that influences product demand. Two decades later, some economists study how product features may be incorporated into statistical models for more rigorous studies of innovative products demand. In a highly competitive business environment the knowledge of product demand is essentially of interest to producers and governments for marketing strategies and taxation purposes, respectively.

Consumer demand for innovative products such as cell phones, IT devices and cars are influenced by the product’s characteristics that are essentially differentiated from their competing brands. Apart from changes in the prices, the introduction of new features may have a positive effect on sales because consumers are willing to pay for the features they value. As the competition in the business environment becomes stiffer, producers are often on the move to improve product features and introduce new features so as to have more monopolistic power over their product prices and influence over market share.

As a result of competition and product differentiation, conventional microeconomic theories and econometrics models cannot express the demand for innovative goods sufficiently. A consumer’s decision to buy a product is no longer influenced only by prices and other factors suggested by microeconomic theories, but by qualitative factors such as product features that continue to change because technological advances are gaining ground in the product market. As such, consumer sensitiveness to product price changes and sensitiveness of product substitution with respect to price changes cannot be calculated accurately for policy-making purposes.

Today, more advanced scientific tools in the forms of research methods and computer programs that tackle complicated research problems are available. Qualitative factors can be analysed and the substitution effect that arises because of reputation and new product features, for instance, can be measured. Essentially, it depends on analysts to acquire the knowledge as “add-on” to the basic knowledge for better understanding of the market. Since demand takes place when consumers are willing and able to buy, prices and income remain important factors that influence the demand for any goods. As in a crime scene investigation, evidence such as hair, fingerprints and ballistics continue to remain important and relevant although the use of DNA has become feasible and reliable as technology improves.

Callie Lau is a lecturer with the Faculty of Business and Design at Swinburne University of Technology Sarawak Campus. She is contactable at wlau@swinburne.edu.my