Supply and Demand Analysis and Market of Apple Ipad Air - Case Study Example

Supply And Demand Analysis and Market of Apple Ipad Air Introduction The theory of demand and supply is one of the most conventional theories in traditional economics. It is the basic premise which determines the price of a particular product in the market (Dwivedi, 2009). The theory of demand states that as the price of a product increases the demand of the product falls. Similarly the law of supply states that as the price of a commodity increases then the supply of the product also rises. The intersection of the demand and supply dictates the equilibrium price of the product (Veseth, 2014). There are a number of market structures like perfect competition, monopoly, oligopoly and monopolistic propagated by economists (Veseth, 2014). The aim of this paper is to evaluate the market demand and structure of Apple Inc. This paper will also consider the market structure of Apple Company as a whole on the basis of its product Apple iPad Air. The price of the product and its relative position with other products is also to be discussed. Apple Inc: Company Profile The company was incorporated in 1977 and in the last thirty years it has become one of the most distinguished companies in the electronics market. The company is headquartered in California. The business profile of Apple Inc includes a number of activities like designing and manufacturing of computers, mobile phones, music players and tablets (Reuters, 2015). Some of the products of the companies include i-phones, i-pod, iPads. The company also creates a number of operating systems like iOS and OS X (Apple Inc., 2014). Apple Inc. also manufactures a number of accessories and provides subsidiary products for others. A number of applications are also produced by the company like i-tunes, Mac App store and i-cloud service. As of 2013, the gross profit margin of the company was 37.6%. However, the value in 2012 was 43.9% indicating that the gross profit margin had fallen over by 6%. the net sales of the company had improved by $14,402,000,000 from 2012 to 2013 (Reuters, 2015). In 2014 the annual revenue of the company was US$182 billion making it the second largest information-technology company (Apple Inc., 2014). Apple iPad air iPad air is one of the latest introductions in the Apple iPad family that has significantly captured the attention of the global media. This is the lightest version of the iPad having a total mass less than a pound. It has advanced features like a retina display function which allows customers to have a better experience with the camera and other visual features. It has the smallest width of 7.5 mm making it one of a kind (Apple Inc., 2015). It runs on the iOS 7 software and has 22% less weight than the immediate previous version which was named as iPad2. The aluminium body of the product and its major advancements over the iPad mini has already made it a major hit among the public (Apple Inc., 2015). The new product has M7 coprocessor making it relatively faster over the previous versions. Supply and Demand Analysis In terms of supply and demand analysis smart phone company like Apple have always followed a unique strategy. Just before the launch of any new product, the company undertakes a huge promotional strategy which generates enormous interests among the public. Once the initial success of the product is determined then the mass production begins. However, the prices are not altered unless the next version of the product is introduced in the market. In terms of economic theory the situation of Apple iPad Air can be defined as that of luxury goods. These types of goods do not fall under the category of normal goods for which a rise in income is matched by a proportional rise in demand. In case of luxury goods, the demand for these goods increases faster than the rise in income of the consumers. The rationale behind the possession of these goods is the desire to obtain a social status (Hirschey, 2008). The price of these goods plays a major role in providing them a social status and people buy these goods on account of the price. In case of Apple iPad Air, the price of the product was higher compared to the previous versions. This does not deter the people from buying the latest versions of the product. The law of supply however holds good for Apple and the suppliers supply more to satisfy the demand. In a recent article that has been published, it was reported that the demand of Apple products is overpowering the supply and suppliers are unable to keep pace with the demand. This indicates that the demand of the product is extremely high despite the high price. In many instances the demand for i-phones are so high that the suppliers of the company are mostly unable to satiate the demand for iPads (Web Spiders, 2015). The surging global demand of the product has made it difficult for the Apple authorities to generate enough supply for the product (Luk and Wakabayashi, 2014). Detailed reports had previously shown that the company is consistently trying to revive its demand for Apple iPad as this segment of the business have been experiencing slowdown. The very launch of the iPad air bears a testimony to the fact that the company is trying to revive its sales in this segment. This is the reason for which the research and development wing of the company has come up with the new product. Market Structure of Apple The market structure in which Apple Inc. operates can be considered as Monopolistic Competition. This is a type of market structure that can be explained as a cross between monopoly and perfect competition. Monopolistic competition is a type of market structure that is characterized by large number of buyers and sellers yet it is not similar to perfect competition. This is because there is a considerable extent of product heterogeneity. This implies that the producers manufacture a range of products which are different from one another. The output produced by one particular firm is quite different from the output produced by other firms and it is this unique characteristic of the products which allows producers to charge higher price compared to its rivals (Krugman and Wells, 2004). The buyers or consumers in a monopolistic market assume that no two products are same and they pay higher price for a product if it satisfies their desire. This provides a chance for the producers to exercise a control over the market price. However, the producers cannot charge very high price like monopolists do. This is because there are other sellers in the market selling similar products. This means that producers have characteristics closer to the monopolist producers. In a monopolistic competition both the producers and the consumers have complete knowledge about price, quality of products and costs (McDowell, 2009). The price and output decisions of monopolistic competition involve features of both perfect competition and monopoly. This is because in short-run, the producers want to charge a price like the monopolist at a point where MR=MC. This is shown in the following figure: Figure 1: Short-run and long-run equilibrium under monopolistic competition (Source: Hirschey, 2008) The equilibrium price and output in the short-run is given by points P1 and Q1. In this situation a firm may face three different scenarios namely earning supernormal profits, normal profits or minimum losses. The firms will earn supernormal profits if the average cost of production is lower than the average revenue of the product. The firms will earn normal profit if the average cost of the firm’s production is equal to the average revenue of the firm. Finally, if the average cost is higher than the average revenue then the firm will earn losses (Gans, King and Mankiw, 2011). However, the firms will stop production if the average revenue falls below the average variable cost. In long-run, the monopolistic producers can change their production capacity as per the changes in the demand condition. However, in the long run it is not possible for firms to earn supernormal profits as it would attract new firms to enter the market as entry is free in a monopolistic competition market. The new firms entering the market will charge a lower price for the product as the overall supply rises and the old firms have to comply. Figure 2: Equilibrium in long-run (Source: Jain and Khanna, 2006) At the point of equilibrium marked by point A the equilibrium price is OP and the output OM. At this point the long-run average cost marked by LAC is tangent to the average revenue curve marked by AR. However, the AR does not meet the LAC at its minimum point indicating that the firm is not producing at the optimum level. The case of Apple iPad Air is exactly similar to this situation. The number of buyers in the market is infinite. The number of sellers in the market is also significant. For instance, there is Samsung, HCL, Dell, HP and Lenovo to name a few. All of them have similar product offerings. However, Apple iPad Air has positioned itself as a product which can be easily differentiated from its competitors in terms of design, innovation and features. This has allowed Apple Inc. to charge a higher price for their products. The innovative features of Apple iPad Air like a unique operating system, good after service and brand loyalty have allowed the company to justify the price charged for it. It has already been observed that prior to any product launch; Apple Inc. creates a considerable buzz in the market arresting the attention of multiple audiences. The amount of profit that can be earned by Apple in short-run will depend upon the demand that is being faced by the company. A higher demand would indicate that it will be able to charge a higher price in the short-run. This strategy has allowed Apple to earn supernormal profits during the initial days of the launch. This situation will however not continue for long as the market structure is highly competitive. The competitors can soon copy the design and the uniqueness of the product is lost. In long-run the situation is likely to change and Apple Inc. cannot earn supernormal profit. This happens because of both internal and external conditions. Internal conditions may be launching of latest variants of Apple iPad air and in that case the price of the older versions will have to be curbed. External conditions depend on the actions of competitors like launching of similar products in the market by copying designs. In either of the cases the Apple-ipad Air cannot earn super normal profits for Apple Inc. in the long-run and the equilibrium level of output will be determined at the point where the long-run average cost curve is tangent with the average revenue curve as has been shown in figure 2. Conclusion The new product of Apple Inc. and latest addition to the iPad family, iPad Air has created a stir in the market from the day of its launch. The demand of the product is so high that the suppliers are struggling to maintain the supply. The overall study of the Apple Inc. firm leads to the conclusion that the company operates under monopolistic competition. IPad Air has been priced above the market price on account of its unique and innovative features showing the monopolistic nature of behaviour. However, formidable competitors in the market provide an essence of competitive behaviour by Apple Inc. Under such a market structure firms tend to earn supernormal profit in the short-run if the demand of the product is very high. This is certainly the situation for iPad Air which is facing a high demand. However, from conventional wisdom it can be predicted that such a situation is unlikely to continue in the future due to a number of factors. Supernormal profits will attract other firms to enter into the market driving the profits down. Ultimately firms will only earn normal profits only. IPad Air is initially cashing on the high demand of the product enabling it to earn supernormal profits. Eventually in the long-run as rivals imitate the product and new firms enter the market it can no longer earn supernormal profit. Reference List Apple Inc., 2014. Annual report. [online] Available at: [Accessed 6 December 2014]. Apple Inc., 2015. Apple announces iPad air-dramatically thinner, lighter & more powerful iPad. [online] Available at: [Accessed 6 December 2014]. Dwivedi, D.N., 2009. Essentials of business economics. New Delhi: Vikas Publishing House. Gans, J., King, S. and Mankiw, N.G., 2011. Principles of microeconomics. Connecticut: Cengage Learning. Hirschey, M., 2008. Managerial economics. Connecticut: Cengage Learning. Jain, T.R. and Khanna, O.P., 2006. Business economics. New Delhi: VK Publications. Krugman, P. and Wells, R., 2004. Microeconomics. New York: Granite Hill Publishers. Luk, L. and Wakabayashi, D., 2014. Larger Apple iPad to be delayed. [online] Available at: [Accessed 6 December 2014]. McDowell, M., 2009. Principles of microeconomics. New York: McGraw-Hill Higher Education. Reuters, 2015. Apple Inc (AAPL.O). [online] Available at: [Accessed 6 December 2014]. Veseth, M., 2014. Introductory microeconomics. New York: Academic Press. Web Spiders, 2015. Global demand of apple iPad outstrips supply. [online] Available at: [Accessed 6 December 2014]. Read More