Originally Posted by Sean Gruber
Economist: low demand necessitates higher prices, but as demand increases, prices fall. Look at the computer business, or the home video business. The first computers and VCRs had very small markets and were therefore extraordinarily expensive. But then demand grew and the price could come down, leading to even greater demand.
Me: But doesn't low demand necessitate lower prices, to incentivize buyers?
Economist: Yes, that is true as well.
This economist exists only in your imagination. The market when consumer VCRs were introduced was anything but low demand. The early adopters created huge demand, that's why there was no shortage of customers ready to pay $1000 in 1978 dollars
for a video recorder, despite having no market for prerecorded videotapes.
When the early adopter market was saturated lowering prices expanded the market to less technical users. At the same time the creation of a prerecorded videotape market, with a consequent boom in video rental stores, made the product much more useful to the average consumer.
As prices fall - or rise - the composition of the market changes. To understand the price of a specific product you need to know all the factors impacting supply and demand. The price of an innovative product is a lot harder to predict than a commodity. That's why you can buy oil futures but not ipad futures.