Apple Inc. is a company known for its innovations. The Company is consistently delivering new products to the market that have customers waiting in lines overnight to obtain the latest technologies. While Apple does employ strong marketing strategies and has a strong customer following, the products are still exposed to the theories of economics. The following paper will explore the economic theory of supply and demand as well as the price elasticity of demand for Apple’s latest product - the iPhone.
Two weeks ago Apple Inc. released its newest product, the iPhone 5. Apple is a world leader in innovative consumer electronics and the iPhone 5 represents the newest smartphone technologies available on the consumer market. The external design of the iPhone 5 is very similar to its predecessors; however, the new phone has brand new characteristics – new color options, improved operating system speed, a design that allows the phone to withstand time through an ability to adopt new upgrades, the best camera Apple has manufactured, and touch I.D. (Smith). While the new technologies are on the cutting edge of innovation, the cost of accessing the iPhone is a staggering $649 for the cheapest model (Smith). In order to gain a competitive advantage by moving the demand curve and price point in favor of the consumer, Virgin Mobil has unveiled a tempting incentive to lure consumers to make the iPhone purchase via long term contract. The contract effectively reduces the cost of the iPhone from $649 to $549, a cost savings of $100 to the consumer.
The iPhone has been a tremendously popular technology since the first smartphone was made available to consumers. The iPhone 5 is no exception and nearly all of the Apple models are sold out. According to Smith (2013) “many Apple fans have already taken advantage of Virgin Mobile’s iPhone 5s and iPhone 5c offer…Virgin Mobile has already sold out of the white, green, pink, and yellow...the blue iPhone 5c is the only phone still available.” Some analysts have argued that Apple purposefully restricts supply to maintain higher demand over time. For Apple, there is no incentive to reduce price if all their inventory supply can be sold at the $649 and above price point. Essentially, they have reached market equilibrium that supports healthy sales at the current price point. On the other hand, Virgin Mobile, in an effort to gain additional market share versus competitors like Verizon, are offering incentives to gain a competitive advantage.
Apple’s purposeful restriction of the supply provides a good example of the impact on price point over time and volume of the shortage. As an example, Table 1 shows a typical supply and demand curve for the iPhone. The point in which the supply curve and the demand curve intersect is the market equilibrium. At this point is the price in which the supply equals the demand. This point indicates the most efficient and profitable relationship between supply and demand. Table 2 shows the shift in the demand curve when the demand exceeds supply at a given price point. The shift of the demand curve to the right without the ability to supply that increased demand creates a zone that illustrates a shortage. Essentially, there isn’t enough supply to meet the demand within this space. When the shortage is confirmed, this should work to entice Apple to increase the total quantity supplied, but not necessarily the amount available at any given time. Over this period, Apple could, in theory, raise the price incrementally to test the price point and embrace more profitability. Apple could use this strategy over time until there is no shortage at the new equilibrium points.
There is an inverse relationship between price and demand. Price elasticity of demand is the measure of response by the consumer to show the change in the amount demanded after a shift in price. It can be a very accurate measure as a percentage in the change of quantity demanded as a result to a specific change in price. Price elasticity is usually a negative number. This number shows the exposure of a good or service to demand changes at a change in price. A measure of more than -1 (or absolute value of 1) indicates that a change in price heavily influences the amount of demand for that good. The measure of elasticity is the amount over 1. Revenues are maximized at the equilibrium where the price is set to obtain a price elasticity of demand value to be 1.
The iPhone is also exposed to price elasticity. According to Fox News (2013) “Chinese web users dismissed the ‘low-cost’ iPhone 5c as too expensive Wednesday, raising questions over Apple’s ability to build up sales in the world’s biggest mobile market.” Consumers in developing countries just aren’t willing to pay as much as in the U.S. for innovative technology. As the price of the iPhone rises, the demand for the smart phone decreases. In an effort to control elasticity and establish a healthy and profitable price point over time, Apple adopts a strategy to purposefully restrict supply, creating a slight shortage, and then trickles out their supply over time. This strategy is based upon basic economic theory that when a shortage is created the price point can be maintained over time. The goal of Apple is to create a shortage just small enough that they keep the attention of the consumer and they are willing to wait until the supply rises and they can obtain the iPhone.
Fox News. (2013). “China web users say new iPhone 5C is too expensive.” 5 Oct. 2013. Web. 5Oct. 2013.
Smith, D. "Apple iPhone 5s, 5c Release Date Arrives: $100 Price Drop Announced By VirginMobile." International Business Times. N.p., 5 Oct. 2013. Web. 5 Oct. 2013.
Smith, D. “Apple iPhone 5s Release: 5 Reasons Why It’s Worth The Price To Upgrade.”International Business Time. N.p., 5 Oct. 2013. Web, 5 Oct. 2013.
(Tables 1 & 2 omitted for preview. Available via download)