What are the elasticites of demand for iPhone?

By: Lim Chun Hong

The article ‘iPhone makes Chinese eyes light up', http://www.economist.com/node/21559624, in 28^th July 2012 stated that the sales of apple’s product are booming and how responsive is China’s citizen react to it.

As no one has the perfect window for the future, certain trends such as rise in price of goods and services such as cars, food, or houses definitely exist along the time. Often the decisions that consumers made whether to consume such goods or services are depend on the change in price of goods and services. Based on the article  ‘Apple in China, iPhones make Chinese eyes light up’,  it could further strengthen the point of saying that it is important for everyone to understand the market situation and deal with the economics problems wisely in order to maximize consumers’ benefit. In addition, this article has covered the elasticities of demand such as price elasticity of demand, income elasticity of demand and also cross elasticity of demand in microeconomics, by providing data, results and graphs, giving a clearer view for readers to understand how do markets actually work with the influence of available factors and variables.

First and foremost, it is true to say that Apple brings huge impact to the economy by providing its services such as the introducing of smart phones. According to the article, Apple achieved excellent results, earning high revenues due to the impressive sales. This can be explained that there is high quantity demand from consumers. It seems that consumers in China have high willingness and ability to pay for Apple’s product, even though the gadgets’ price is relatively high for a phone. However, Apple’s products such as iPhone, indeed making consumers’ lives way easier. For example, consumers still able to update themselves with the access to internet through the smart phone. It can be deduced that Apple’s product is high price elastic in demand. This is because a smallest possible fall in price of iPhone would lead to an infinity large rise in quantity demanded. Also, while others remaining the same, the proportion of income spend on iPhone is high, which also proved that there is high elastic for the demand of it. This can be proven by high sales of iPhone even though selling at the price of $800 compared to other smart phones, which costs less than $300.

Next, income elasticity of demand. A normal handphone is already a basic necessity good in our everyday life. Moreover, a smart phone such as an iphone is more advance and provides more benefits and advantageous such as access to the internet. According to the article, as 20% of Apple’s revenue is from China, it shows that China’s economy is expanding and people are enjoying the rise in purchasing power when income rises. Hence, it can be said that Iphone is income elastic, because of having a value of greater than 1. It is a normal good because the percentage increase in the quantity demanded is greater than percentage increase in income. A rise in income would definitely lead to a rise in demand for such good.

 Lastly, the cross elasticity of demand also mentioned in this article. With the presence of substitutes in this market, Iphone is said to be having a positive value. When the price of iPhone increases, it will become less affordable, hence, the substitutes for iPhone will experience a rise in quantity demand too. For example, if the price of iPhone increases magnificently, no one would be able to afford to buy it, even they do, Apple would still experience a fall in sales because the price is too high, consumers would probably switch their choice, try to get other smart phone which provides the similar service , as for now, Samsung in Korea, that manage to compete with Apple’s product in this market for so long because of the lower price rate and services such as front camera, or free applications. Also, according to the Law of Demand , while others remaining the same, the higher the price of a good, the smaller is the quantity demanded. Hence, it is true to say that Apple’s product such as iPhone do have close substitutes. Also, by doing so, consumers have higher consumer surplus, and also higher disposable income to consumer other goods and service.

 However, it can be still criticized that iPhone is income inelastic in demand.  Consumers would probably choose not to buy iPhone. As this is a competitive market, there are more and more phones have the similar services with iPhone too, such as access to the internet. If phone’s screen quality is not really a matter for one consumer, he would probably choose other phone, such as Nokia. Also, it would still depend on the magnitude of the rise in income. Even though iPhone is a normal good, if there is only a small rise in income, the sales of iPhone would still increase, but not significantly.

Besides that, there could be the presence of market failure. As consumers do not have perfect information about the price of the products. This is also known as asymmetric information in the market. Even though consumers have high willingness and ability to pay, but they maybe do not know what the real and exact price to pay are. In addition to this point, the exist of asymmetric information is because the lack of information for Apple company. As there is over production of iPhone 4s, even though the demand from China is flying sky high, but the sales of iPhone still fell, which is mentioned in the article.

As a conclusion, Apple has brought huge impact to the economy is definitely a positive statement. It is still depending on one himself whether to consume such goods and services or not. After reading this article, I could now have a better point of view on both consumers’ and producers’ behavior in the market, how does it work to form the market equilibrium price with the available determinant of factors, and also the elasticity of demand. Besides that, this article could also helps to provide a better understanding towards the scope of microeconomics for the readers.