Apple’s Iphone Microeconomic Analysis

Apple’s iPhone Microeconomic Analysis

Giggsa Nieves

January 14, 2018

MBA 502

Apple is one of the world’s leading technological companies. Its innovative products have made Apple one of the major players and leaders in this industry. They played a major role in revolutionizing the handheld device from a plain cell phone to what is known today as the smartphone, with its launch of the first iPhone, in 2007. It modernized our communication through its unique product usability and experience-causing the iPhone to be a must have device.

        The iPhone along with the other Apple products created what is known as the halo effect.  The halo effect is known in the marketing industry as a methodology that explains consumer bias towards products they favor because of their positive and satisfied experience with the product and manufacturer.  Because of their cutting-edge technology across their product platforms, customers choose to stick with the Apple brand rather than buying different products from different manufacturers creating customer loyalty.  The halo effect coupled with deep brand loyalty complements their sales performance (Natalie Y. 2017).

        The iPhone is correspondingly expensive when compared to other smartphones. Premium pricing has a psychological component with customers that represents quality and luxury, which creates a premium customer experience and brand loyalty. Brand loyalty, popularity and luxury status aids Apple’s customers to purchase an iPhone each time a new iteration is released.

        However, that does not imply that when the price increases so does the demand.

There are other variables to take into consideration such as: necessity (essential good) and substitute (non-essential good).  The price elasticity, the change in the quantity demand and change of its price, of the iPhone is inelastic (big changes in prices have small effect on the demand) because customers view it as a necessity- they cannot live without.  Since customers have to have it, Apple can increase the price and it will have limited effect on the demand (Archanco, 2017).

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 Customers are unable to live without the iPhone because of its operating system, software and services, design and material, worldwide reach and distribution and great customer service. In other words, if you want an IOS smartphone, you have only one option: Apple (Eduardo A. 2017).  Since customers have an insatiable appetite for the iPhone there is always a waiting period for the consumer to get an iPhone within the limited released supply. This causes the supply to be elastic due to its high demand and low supply and its continual demand (the demand never decreases regardless of the limited supply).  Being the world’s most desired product transcribes to high demand of the product.

        There are other non-price determinants that impact the demand of the iPhone. It is important for Apple to consider these non-price factors when devising a marketing and promotion strategy (Carla C. 2015).  A non-price factor that highly impacts demand is consumer income.  An ability to purchase any product is reflective on disposable income available to the consumer.  A rise in income can increase demand further impacting the supply curve to shift to the right.  Along with positively increasing the quantities and possibly the prices affecting the equilibrium.  This can cause a shortage in supply, which can throw off the affect the old price to reflect an increase due to the new demand.  An expected consumer income increase reflects in a demand increase in goods, products and services for companies and reversely. However, this inverse relationship affects specific products. The iPhone is not affected by an income boom or crash due to its necessity. Aside from its necessity, Apple has managed to provide flexibility for customers to purchase the iPhone regardless of the price. They created payment flexibility through: (i) contractual discounts and (ii) iPhone Upgrade Program (allows you to pay the phone in monthly installments). Its necessity assists in creating a constant demand for the product.

        Another non-price factor that affects the demand of the iPhone is its branding. Customers have a blind loyalty to the Apple Brand. They have managed to continually deliver exceptional customer experience through superb interfaces, simplicity, design and connectivity with its customers. This connectivity with their customers has fostered a familial community.  It is furthered advanced through direct contact with its brand value at their many accessible retail stores. This experience helps to deepen the intimacy among the product and Apple to love, which innately creates loyalty.

        On the other side of the curve is supply. Supply is the quantity of a product and its availability in the market for sale otherwise it cannot be considered as supply. Two non-price factor that impacts the supply of the iPhone are labor and technological cost. To keep cost down Apple manufactures the iPhone both domestically and internationally. Its part, processor, glass, chips, are purchase state wide and the mass production takes place in Japan and Taiwan aiding in keeping cost down; however, the cost can be beyond their control due to the many different locations and their regulations. If an increase takes place this can impact the cost and time frame of delivering the iPhone into the market. The up side is since labor is cheaper, because it is outside of the United States, it increases Apple’s profit.

Their technological advances are key in keeping them one the world’s leading tech company. To stay ahead of the competition, they must consistently invest in the latest technological advances and pay premium prices, which can be costly at first. They also must be on top of what is the latest ‘thing’ in the technology world since a phone is much more than just a means of communication.

The mobile market is continually growing increasingly forcing more and more of their competitors into the industry. This business cycle creates competitive prices for customers who cannot or do not want to spend a lot of money on a cell phone of their choice. Regardless of customer choice the iPhone is still the one of the top selling smart phones in its industry.

Adam Smith’s invisible hand theory (to attain wealth we must all participate in the exchange of money and products representing the division of labor and the free market) affects demand and supply in reaching their point of equilibrium. Based on the predicted and unexpected changes that Apple must anticipate achieving market equilibrium one taken into consideration is when demand decreases it can be the cause of another or possible product in the market.  Apple’s strategy to ensure demand is not affected by a new possible product and customer choice is by informing the public (way in advance) that a new product will be coming soon decreasing demand for its current iPhone and increasing demand for the coming soon iPhone.

        In their quest to continually lead the smartphone market they are constantly changing their strategies to ensure market significance in their industry. Their approach to leading and remaining one of top tech company is by limiting the among of the production of the latest model. If, however, they decide to change the quantity of supply it will have a considerable change on the price of the iPhone causing a change in the demand and product visibility. If the change was reverse, demand, this will allow for the competitors to participate in the market, such as Galaxy S and Galaxy notes. Therefore, when a new model is introduced into the market the demand and supply must be high to maintain elastic and high profits.

        Apple’s high sales tend to be right after their latest release.  Prior to the release date apple allows customers to pre-order their phone to ensure that supply is met. Yet, there is always a long holding pattern when the latest iPhone is released. Forecasting demand can be difficult to anticipate especially when there are many variables to control, with their latest release the iPhone X, a high price tag and the release of the iPhone 8 alongside. A solution to the shortage in supply would be prolonging releases to give all involved time to produce a product to their specification.  Yearly releases leave minimal room, a few months, to design and release a new phone. Furthermore, production becomes more complicated when you add new components along with getting the product ‘perfect’ before its release date. Overall Apple is not also a leading company in tech world, but also in marketing which deals with navigating the right supply and demand.  

Factors of production utilize resources, generally raw materials, and transformed them into good and services that generate profit for companies and products that consumers can consume.  There are four factors of production: land (natural resource), labor (work), capital (machinery) and entrepreneur (business) that are needed for supply.  These factors are fundamental in producing the economies’ consumable goods and services.  In order to make consumable products a company has to incur cost.  The costs are either fixed or variable.  Fixed costs are independent of the output and remain constant, such as rent, equipment, utilities and salaries.  Unlike variable costs that are dependent on output and vary, such as materials.