Assignment Report

[ ]SUBMITTED TO Miss Sania Usmani

IPHONEFINAL REPORT

GROUP MEMBERS

UROOJ TABANI (22028)

SYED UZAIR (23308)

MUHAMMAD HABIB (17645)

MICROECONOMICS IPHONE

LETTER OF TRANSMITTAL

DECEMBER 13, 2013

Miss Sania Usmani Faculty Member, Iqra University, Defence View (Ext), Karachi – Pakistan.

Respected Madam,

We students of BBA hereby present the report that you asked for to submit on 13/12/2013 as part of the course requirement in MICROECONOMICS which is a completion of all the hard work we have to put together during the course of the semester.

We hope that this report meet your expectations. We look forward for your favorable response for this report.

Yours truly.

UROOJ TABANI (22028)

SYED UZAIR HASSAN (23308)

MUHAMMAD HABIB (17643)

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ACKNOWLEDGMENT

We would like to extend our genuine regards to our teacher who has guided us for this report, without such great and immense co-operation the task would have been a cumbersome one. All these people who ultimately proved to be catalysts include our ever-helping teachers, colleagues and friends.

In this regard we would like to point out the exceptional supervision bestowed by Miss Sania Usmani for extending her help and co-operation throughout the dissertation, her guidance is priceless not only for present but also for the even challenging times ahead.

And last but not least, we thank Almighty Allah to whom we must ask and to whom we must seek for help and guidance.

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SUMMARY

In this report we discuss about the demand and supply of iphone in industry, and how the prices of iphone affects the individuals as the demand get high so what affects are made on the price and what are the measures taken by the apple to overcome the shortage that occur in the market .we also discuss how the supply and demand of iphone affect the market and what are the different factors that affects its prices and demand that includes the manufacturing cost , labor market and the industrial competition .Apple iphone having a edge over the industry due to its durability but its prices are so high that everyone cannot purchase it but despite the fact there are no substitute of iphone. There are many cell phone available in the market with a affordable cost but iphone having IOS (operating system design by APPLE) which make it unique in the market. The price elasticity if iphone is high because it is consider as luxury item. Even the prices of iphone are so high but its demand does not fall due to the features that offered by the APPLE company. Iphone having a large market around the world. Taxes that placed on it having more burden to the consumers side as the people willing to buy it at any cost. Iphone having a monopoly in the market so that they set the prices by their own because there are no price ceiling placed by the government. According to the analysis the demand of iphone depend on the incomes of consumers the countries where the consumer income are low , the demand are also low but overall iphone having a large market according to their financial report the estimated revenue earned by the iphone is 38 bln $.

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TABLE OF CONTENT

S.NO TOPICS PAGE #

1 Supply and demand 5

2 How iphone affects prices in the market 6

3 Prices affects individuals 7

4 Factors affect supply and demand 7

5 Manufacturing cost/substitute product 8

6 Prices elasticity for demand ( IPHONE) 9

7 Market of Iphone 10

8 Taxes on sale 11

9 Market structure 11

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SUPPLY AND DEMAND

The quantity demanded for iPhone exceeds the quantity supplied by Apple; therefore there is a shortage of supply. Apple could actually make more sales because the quantity demanded is expected to be 10 million units. If Apple managed to supply 10 million units of iPhone to meet the future demand from consumers, Apple can maximize its profit at the equilibrium point where efficiency takes place; neither overproduction nor underproduction.

For example, iPhone users are acknowledged as a rich people or maybe a ‘tech geek’. All these

area have differentiated iPhone from its close substitute, but not a perfect substitute. iPhone fans, for instance, are willing to pay more for iPhone. So, when its price increase, the quantity

demanded for iPhone decreases but it does not necessarily decrease to zero unless the price rises by a large enough amounts. When consumers switch to its substitutes, the demand curve for iPhone will shift to the left, but not very significant i.e. decrease in demand. Based on Graph

below , as consumers turn to alternative smart phones, the demand curve D1 shift to D2.

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HOW IPHONE AFFECT PRICES IN THE MARKET

However, iPhone is not going to gain economic profit for long. Eventually, its competitors as well as new firms enter the smart phone market as iPhone makes an economic profit. As consequence, the demand for iPhone decreases as more firms join the market. The demand curve and marginal revenue shift leftward. Thus, the profit maximizing quantity and price fall. At the profit maximization the price change equals average total cost, so economic profit is zero. In order for iPhone to regain profit in short run, Apple has to launch new phone to start the cycle again. This means that Apple would have to invent new phone that even better differentiated so that Apple can compete in the market with greater sale value. This situation can be seen when Apple launched iPhone 5 after iPhone 4S has been in the market for a year in response to other smart phones like Samsung Galaxy enters the market.

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PRICES AFFECTS INDIVIDUALS

While Apple has generally kept tight-lipped about the launch of its new iPhones, there are a few things that most Apple fans have been able to count on each year. One is that the company will introduce one new smartphone a year. And the second is that last year's model will sell at a $100 discount and its 2-year-old version will be $200 less expensive than the new one -- or it will be free with a two-year carrier contract.

FACTORS WHICH AFFECT SUPPLY AND DEMAND

Demand:Apple Inc. has been a world leader as well as an innovator in the technology sector of the market. Since its inception, the demand for its products by consumers has been stagnant. In recent years, the company has seen a dramatic increase over a spread of ten years in demand for Apple's products and services. Apple's total revenue rose from $9.8 million in 1996 to above 19.3 million in 2006, which is a substantial increase of 96.43 percent. The 9.4 million dollars increase is an indicator that the company has a strong demand for its products.

Supply:

Apple Inc. has faced various shifts in relations to its supply. Government regulations, such as environmental policies by international and local authorities, as well as labor and machinery costs are two important factors that can cause a shift in supply. As companies across the nation are attempting to provide a safer working condition by minimizing environmental impacts by one's business operation, the international and local governments are implementing stricter policy which can have a huge affect on supply.

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MANUFACTURING COSTS:

The costs of labor and machinery can cause a shift in the supply. Any alteration in price that affects personal computers or the raw material market will cause 'ripple effect' on Apple's prices. For instance, if there is an increase in the cost of production or raw material, the cost that can be produced or supplied will be higher which will shift the supply. In other words, Apple Inc. will see a decline in its profit if the cost of production increase, which will cause a shift to the left in the supply curve. The company will always experience a shift in the supply curve when a price change occurs for both raw materials and production.

SUBSTITUTE PRODUCT

Apple Inc. is able to shift demand relative to substitute products because there are more units sold of Apple products than its competitors.

Additionally, the tastes and preferences are also important factors which can shift the demand for Apple products. Consumers are willing to purchase Apple's Iphone because the products are known for its longevity. In general, it seems as though the competitor's products does not have an extended life span, which indirectly forces consumers to demand Apple products. In addition, Apple is able to capture a larger consumer base in the graphic and computer science industry because the computer software is more compatible with Apple's operating system.

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COMLIMENTS AND SUBSTITUTES

Availability of Substitutes - Availability in Phones : There are many substitutes for Mobile phone. Phones that are similar to iPhone are Samsung Galaxy SIII, Motorola Droid MARZ, HTC One

X, Samsung Galaxy Note SII, LG Optimus.

Availability in Apple iPhone 5 : there are no substitutes if you want this specific iPhone.Closest substitute and competition is Samsung Galaxy SIII. However, studies show only SIIIs sold 20 million in 100 days whilst iPhone 5s sold 5 million within the first 3 days. This means on average Samsung only sold 200,000 phones a day while Apple sold 1.7 million phones a day.

THE PRICE ELASTICITY OF DEMAND FOR IPHONE

The demand elasticity depends on people income, since iphone is considered as luxury product and the price is quite high, people with high incomes probably will buy those iphone because they will still have money to buy some other things. But for people with average income they will think twice to buy this phone, because there will be some opportunity costs whether they decided to buy it or not. Opportunity cost is the best alternative sacrificed when you choose something, so if they think to buy this particular phone they will sacrifice other thing to get this product, maybe after they bought iphone5 they cannot have other expensive product since they choose the iphone 5. For people with low incomes, they probably will search another phone that has same functions with iphone but with lower price such as samsung or nokia. But, if iphone5 price is getting lower, people might buy this product if it fits their income.

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MARKET OF IPHONE

Apple Company is one of the oligopoly markets. To make it more understandable, oligopoly market is a market structure characterized by a small number of firms that each behaves interdependently. There are other companies that also will make a product that similar to iphone5, for instance, Samsung companies are producing SIII which quite similar to iphone5 and nokia also producing new phone which called lumia that similar to iphone or Samsung. As we know, Samsung and nokia are more cheaper than iphone, so why the demand for iphone5 still high? It probably because apple companies provide a better service and the quality of the product is better, and some people are already loyal to apple product.

Since iphone5 is the new output nowadays, people with the higher income willing to buy this particular thing in higher prices. It can cause consumer surplus. Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (demonstrated by the demand curve) and the total amount that they actually pay at the market price (P1). For instance, people with higher income willing to buy iphone 5 in very high price, let’s say the price they willing is $2000 while the market price is $850. So the consumer surplus is $1150.

The iphone 5 production can be regarded as underproduction because the demand is high but the supplies remain. Underproduction is the quantity supplied by the sellers are lesser

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compared to the quantity demanded by the buyers. Underproduction can also cause a market failure, that means apple company is regarded as inefficient company.

SALES TAX

Apple’s iPhone 5S price varies dramatically by country, but it is only when you see iPhone prices as a percentage of local earnings that you discover just how expensive or cheap they really are. At £549 for a 16GB iPhone 5S, the UK is 22nd in the world for iPhone 5S – behind Saudi Arabia, Thailand, China,

Australia, and even Switzerland. The prices, including those for the US all include sales taxes (at Californian rates for the US).

MARKET STRUCTURE

Apple was the first company to successfully incorporate its innovation into smartphones.

The term smartphone only came popular after Apple introduces their first smartphone in

2007 – iPhone. I believe Apple’s biggest success was at their application section as they

open up the development to everyone. Apple does not require much skilled labor and

equipment to develop applications for their product. The usage of personal resources is

low but the output is high, furthermore the application developed fits the consumer’s

needs. Hence in their application development, Apple is allocatively efficient.

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http://www.theguardian.com/technology/2013/sep/18/iphone-5s-review-apple


Apple tries to create a premium brand image for their product. I believe this is the failure

in iPhone. Apple thinks that they can at least monopolize the market for a period of time

like how Nokia did. As time changes, technological factors improved, which hasten the

process of imitation or creating substitutes. Nokia while monopolizing the market has

already taken measures of mass production to provide mobile phones at a price even

lower than oligopoly. However, Apple on another hand is seeking to sell the iPhone as a

premium product, in other words a superior good. Where the demand increase by a large

amount as income rises; in addition, the product is also scarce and high priced. To sum

up, the income elasticity for iPhone is highly elastic for medium income group.

Apple monopolized both the operating system and the product for smartphone using iOS

and iPhone. It didn’t last long till the monopoly was infiltrated as technology factors

hasten the process of creating substitutes as compared to Nokia’s time. On one hand, iOS

faces Android, an operating system bought over and later on developed by Google. On

the other hand, iPhone faces another strong competitor that long existed in the mobile

phone market – Samsung. Instead of developing both the hardware and software like

Apple did, Android and Samsung specialize in their respective field. Android is only

focusing on developing the smart phone’s operating system where Samsung focuses on

providing and manufacturing better hardware for the phone. This measure allows

Samsung and Android to operate more efficiently than Apple.

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Documents

Assignment Report