Eyeing The 'i' from An Economics Point of View

 The dawn of the history of mobile phones has just been broken.

Ever since, Apple Incorporated released their first ever iPhone, the technology world seems to be revolving in a slightly different way. Every year, results have shown that about two thirds of the company’s return is originated from the sales of the iPhone itself. This makes the phone a vital product for the company in order to achieve maximum profit.

So, what exactly is the elasticity of the iPhone? 

Before I begin to get further into details, it is necessary for me to define what exactly price elasticity of demand (PED) is. According to McConnell, Brue and Flynn, price elasticity of demand is the measure of how sensitive a consumer is towards a price change for a certain good and service. So, in the Apple iPhone’s case, it means that how a consumer would response to the price change of the iPhone, whether it has risen or fallen. The first iPhone to be launched in the US was priced at $599 in early 2008 and the rough estimation of total sales for that first quarter was 270,000 units of iPhone. For the next quarter, the price had been decreased by $165 and an estimated total number of iPhones sold for that period has increased to 1,119,000. Using the midpoint formula, the PED of the iPhone is found to be 3.8. This means that in every 1% change in the price, there is a 3.8% change in the quantity demanded. In economic terms, this indicates that the iPhone is a highly elastic demand. 

  

From the sketched graph above, the total revenue generated by Apple Inc. in the first and 2nd quarter of 2008 from the sales of the iPhones can be calculated. For the first quarter, they have made total revenue of USD$16,173,000USD while for the second quarter, an astounding total of USD$552,786,000 was received. This proves the economic theory which says that if a demand is elastic, and if the prices are reduced, the total revenue will rise. That figure is just from the total income from the sales of their iPhone products. Just imagine how much are they really earning from the sales of their iPods, iPads, Macbooks etc. 

However, there’s always a downside to every good thing, whether you like it or not. Apple Inc. may be the captain behind its wheel, steering its ship which is the whole company, to great heights, but they may not have the control over the other external factors that determines its elasticity, for instance, substitutability. We should not forget that the iPhone is not the only mobile phone available in the market as there are many other choices of brands of mobile phones such as Nokia and Blackberry that consumers can consider to buy from. The higher the number of substitutes a demand has, the more elastic the demand will be. A very well-known and close substitute to the iPhone is the Samsung Galaxy phone. The Samsung Galaxy contains features that are similar with the iPhone and price-wise, they are considerably cheaper as well. Therefore, this makes the brand a tough one for Apple Inc. to beat. 

Besides, not everybody can afford to get an iPhone, which brings me to my following point. The next determinant that makes the iPhone an elastic demand is the proportion of income earned by consumers. If the iPhone’s price was to change due to certain reasons, the quantity demanded for it would definitely be greatly affected, especially by average income earners, because these changes in price make a significant fraction to their annual incomes and budgets. So, the company needs to know and understand exactly how to arrange their pricing strategies according to the statistics of their targeted consumers. 

In a nutshell, despite a few unavoidable obstacles, Apple Inc. still succeeded by raking millions and millions of dollars just from the sales of the iPhone itself. Their products are obviously a popular choice among mobile phone users in this generation. I foresee a whole bright future for this company’s financial status and could not wait to see the release of the next big thing from them.