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Apple`s iPhone Supply and Demand Essay

Concept of Supply and Demand

There is a general rule in economics that if the price of a certain good or service rises, then the demand for such good or service declines. If the price decreases, then potential demand also increases (inverse relationship). On the supply side, if the price of a good or service increases, then firms will be willing to supply the market with higher volume of such good or service. If the price decreases, then firms will cut their supply of the good or service (positive relationship). The market then adjusts the price of the good or service in order to satisfy both the consumers and the suppliers. This is called market equilibrium. In this paper, an analysis of the supply and demand for Apple iPhone products is the main course of discussion.

Apple iPhone Demand

Last July, Apple iPhone was able to outsell all smart phones in the United States. It almost equaled the sales of the most popular feature phone (LG chocolate), giving it a relatively stable position in the market. New Apple handset models accounted for almost 1.8% of all phone handset sales in the US for about a month. It was estimated that the demand for Apple iPhone was rising at7.2% a month, equivalent to about 5 million units of quantity demanded. The market research firm iSuppli noted

“This is a remarkable accomplishment for Apple, considering that July marked the first full month of sales for the iPhone… While iSuppli has not collected historical information on this topic, it’s likely that the speed of the iPhone’s rise to competitive dominance in its segment is unprecedented in the history of the mobile-handset market” (Marsal,2007).

In short, almost unexpected rise in demand of Apple iPhone was unaccounted by many experts, including of which are some of its competitors. The same research firm also noted that survey revealed that almost 57 % of iPhones (bought in July) were purchased by US consumers. Most of the consumers are aged 17-35. Almost 52 % of the consumers of this product are male, and about 48 % are female, revealing an almost equal propensity to consume for the product among the sexes. Added to that, iSuppli noted that 62 % of the consumers of the product are actually college graduates or those with graduate courses.

Nonetheless, the same research firm noted that “some of the iPhone’s success in July can be attributed to pent-up demand following months of hype (stagnant demand). Real proof of success will come in the coming months as demand patterns stabilize” (Marsal, 2007). This prediction was almost accurate when the demand for iPhone was almost rising at 8% per month (month of June). It was also noted that “based on consumer demand, Apple’s brand image, industry anticipation and iSuppli’s estimates of volume shipments by manufacturers and the market segment, iSuppli is maintaining its projection that 4.5 million iPhones will ship in 2007, rising to more than 30 million units in 2011” (Marsal, 2007).  In short, the demand for iPhone was estimated to be doubling per five years. Apple Inc. was then able to stabilize the price for its iPhone due to high consumer demand. Also interesting to read about Demand and Supply Wii console case study answers

Importance of Demand to Price Cuts and Vice-Versa

Apple Inc. though implemented a price cut on the iPhone by $200. The 8-gigabyte iPhone for example which costs around $599 will be priced at $399. Apple also abandoned the production of the $399 4-gigabyte iPhone in order to boost its other products. Many analysts noted that the price cuts were meant to increase sales by the end of September (the company is expecting a sales of about 1 million iPhones).

 Cutting prices would drive demand for the product to increase. To further increase demand for iPhones, the corporation also announced the release of a new iPod which will enable people to download music wirelessly, sample and buy digital tunes. Nonetheless, the size of the iPod (which is 3.5 inch) was also thought to be a positive response to consumer taste. The iPod touch allows the user to scroll through a set of options, and two fingers are used to adjust picture size.

The price cuts however severely affected the position of the corporation in the stock market. The corporation’s stock dropped by more than 5% (after the price cut was announced). The corporation lost $ 7.40 per share of stock. Added to that, many analysts argued that the percentage drop would increase by 2% per month since the unwarranted price cuts discourage investments in the corporation.

One analyst at the Motley Fool Research and Investment Group said, “It will absolutely help sales – but at what cost? People who bought the iPhone weeks or months ago must really be annoyed, and with good reason they might think twice about being the first to buy future Apple products. This smacks a little of desperation, and it’s very unlike Apple” (Konrad, 2007). In short, the price cut would in the short-run drive the demand for iPhones to skyrocket (due to the inverse relationship of price and demand).

 In the long-run though, the demand for Apple products (including the iPhone) will decrease. The relatively low price of Apple products would make consumers a little uncertain of their market importance. To expound on this statement, each consumer even at a very high price would always want to be the first to purchase a new advanced product in the market. If this is common reaction among consumers, even at a high price, demand would rise (this type of good is called Giffen good).  However, since the new iPod of Apple costs at a low price, the future propensity to consume of each consumer decreases. However, this is just a preemptive analysis of the price cuts. As one may note, it is possible for the demand of Apple iPhones to be high at a low price (since this is the natural relationship between price and demand).

This was affirmed by many specialists on financial stocks. According to Paul Goode, a known analyst of M:metrics, the choice of introducing iPod in the US and British markets is a rational choice preferably since only 10% of the British are listening to music on their cellular phones (and 19% of Americans). He noted that such proportion is definitely significant because it would allow Apple to capture a large share of the market of iPod. He added, “Introducing the iPhone was a necessary defensive move for Apple. If they hadn’t done so, they would lost market share to music phones” (Dennis, 2007) Thus, when Apple launched its publicity campaign, 56% of the people in Great Britain and 64% of Americans are aware of the iPhone. Even more spectacular is that of the people using MP3 player and music phone, almost 40% of then are using the handset as the primary player. With the definite high demand for iPhone in UK and North America (see table 1), Apple would be able to outstrip its competitors by almost 18%.

Table 1 (from Dennis, 2007).

The same table also indicate that 56 of all UK mobile users are interested in the iPhone and 30% of such are “very interested” in the product.

The conflict of analysis between known market and stock specialists is resolved. The high demand for iPhone was the stimulant for Apple Inc. to cut the prices of its product (including iPhone). This would generally maintain the demand for iPhone in the next ten years, at the cost hereby of the value of the corporations stocks. Thus, the demand for iPhone would fluctuate downward if its price was stable. In order to avert the phenomenon of “no first buying” (the decreasing marginal propensity to consume– new products in the market), analysts of Apple noted that even if consumers would be less willing to race to the market for a new version of Apple iPhone, demand would soon rise considerably after the first set of consumers buy the item. In the end, at the cost of the corporation’s stock, its market share would (and correspondingly the market demand) increase.

Does This Indicate That There Is a Surplus of iPhone?

There was initially a surplus of iPhone in the US market prior to July this year. Beginning from June 29 to July 9, however, many AT&T and some outlets of Apple run out of supplies. It was reported that there was an upsurge of consumer demand for iPhone in this period. “AT&T reported on Saturday that the company had all but depleted the supply of the Apple handsets it had been given for the launch just a day before” (Malley, 2007). In fact, the company’s inventory of iPhone was almost empty due to the fact that it was used to supply Apple outlets running out of iPhone.  Apple requested the manufacturers to increase their monthly supply of parts essential to iPhone, an indication that Apple had exhausted their supply of iPhone in the market.

Although, allegations were made, precisely because “each AT&T more than 1800 official stores received few of the devices versus their Apple counterparts” (Malley, 2007), it was noted that Apple did in fact raised their overall supply schedule to suit the increasing demand for iPhones in the market. The official website of Apple reported that almost all American stores where iPhones are sold are beginning to feel the effects of strong demand.  In California, for example, it was reported that Apple outlets ran out of iPhones, with their Bay Areas’ stock having been emptied.

One of the customers was interview. He said, “The Burlingame Apple Store went through two shipments of iPhones this morning, selling out by 10:30AM. I was able to get there just in time” (Malley, 2007).  Similar cases were reported in other parts of the country especially in Atlantic City, Las Vegas, Miami, and Oklahoma City.

It was noted that the number of iPhones manufactured by Apple Inc. may not be enough to suit consumer demand. In an interview, the company’s CEO Steve Jobs said, “We had to make our best guess as to what the demand was going to be and what supply we were going to put in place many, many months ago. We built factories to build these things and everything. We’ve thaken our best guess but it wouldn’t surprise me at all if it ain’t enough” – Wall Street Journal Interview (Lemon, 2007). Apple Inc. is producing iPhones less than its current market demand.

Summary

The price cut implemented by Apple Inc. was a means to strengthen the market position of iPhones. The upsurge of demand was the stimulus in the price cut. This would enable the company to boost its market share (at the expense though of the price of its stocks) – maintaining or even increasing the demand schedule for potential customers – , although it resulted to shortages of iPhones in many Apple outlets (hence, there is no excess supply of iPhones in the market).

References

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Dennis, Tony. 2007. Demand for iphone is strong. URL http://www.theinquirer.net/default.aspx?article=40368. Retrieved September 13, 2007.

Konrad, Rachel. 2007. Apple slashes price of iPhone. URL http://www.heraldtribune.com/article/20070906/BUSINESS/709060365/-1/RSS. Retrieved September 13, 2007.

Lemon, Sumner. 2007. Jobs: iPhone supply may not meet demand (IDG News Service, 06/28/07). URL http://www.networkworld.com/news/2007/062907-jobs-iphone-supply-may-not.html. Retrieved September 13, 2007.

Malley, Aidan. 2007. iPhone supply running low with AT&T, some Apple Stores. URL http://www.appleinsider.com/articles/07/06/30/iphone_supply_running_low_with_att_some_apple_stores.html. Retrieved September 13, 2007.

Marsal, Katie. 2007. Apple’s iPhone emerges as leading U.S. smart phone in July. URL http://www.appleinsider.com/articles/07/09/04/apples_iphone_emerges_as_leading_u_s_smart_phone_in_july.html. Retrieved September 13, 2007.

 

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