Based on the link http://www.nbcbayarea.com/blogs/press-here/Apples-Time-Cook-Blames-iPhone-5-Supply-Not-Demand-171460771.html, iPhone 5
hit the market on September 21, 2012. On its first day of pre-ordering, Apple
managed to get over 2 million purchase, which is 1.4 million more than the
first pre-ordering of iPhone 4 which was released in October 2010. Meanwhile, 4
million iPhone 4S was sold in the first three days after its launching. These
figures clearly show that there is a robust demand for iPhone.
Unpleasantly,
the opening-weekend sale of iPhone 5 has tarnished the image of Apple. It is
not due to the lack of upgraded features of iPhone 5 - it is because of its
supply and demand. Apple was deprecated by analysts who downgraded Apple
because of the shortage of iPhone supply. The analysts expected that more than
10 million iPhone 5 would be sold. However, it only reached 5 million units of
sales. In regard to this issue, Apple’s CEO Tim Cook explained that the small
figure was not due to the declining demand from customers but due to the
insufficient supply of iPhone. Apple also insisted that the demand for iPhone 5
was actually exceeded its supply, otherwise Apple could have generated more
sales volume.
Graph 1: Demand and supply
for iPhone 5 during its launching
Based on Graph 1, the quantity demanded for iPhone 5 exceeds the
quantity supplied by Apple; therefore there is a shortage of supply. Apple could
actually make more sales because the quantity demanded is expected to be 10
million units. If Apple managed to supply 10 million units of iPhone 5 to meet
the future demand from consumers, Apple can maximize its profit at the
equilibrium point where efficiency takes place; neither overproduction nor
underproduction.
Not more than a month after iPhone 5 was launched, Apple confronted with
another issue relating its outsourced assembly operation in China. Foxconn is
an electronic firm that outsources work for Apple and manufactured the iPhone 5
for Apple. It is reported that thousands of the factory workers involved in a
dispute over the strict quality control and being forced to work on a holiday. They
went on strike because the new quality demands imposed on iPhone was difficult
to be met and they were under pressure. As to this matter, Foxconn claimed that
this strike has not led to halted production of iPhone 5 and has nothing to do
with the recent shortage of supply of iPhone 5. Whatever controversy points to
Apple, would it affect Apple tremendously?
In my opinion, the issue on the workers strike is not a big matter to
Apple because iPhone has become a leading smartphone in the market, especially
in the U.S market. Why do many people choose iPhone over other smartphones? The
main attributions to this are the product quality, price and brand. iPhone is
featured with widescreen format that enables its users to watch videos and
touch the screen comfortably. iPhone also runs on the iOS; an operating system
that provides thousands of applications. While many Android phones emerge into
the market, still many phone users believe that iOS applications be the best. Given
the iPhone 5’s sales expectation, it is clear that consumers are willing to pay
high price for iPhone. It is a worth buying phone because of its high quality. Because
of this, Apple can charge a higher price for its iPhone and thus makes greater
profit margin. iPhone also has been a powerful brand in the global market. People
buy iPhone as a status symbol. For example, iPhone users are acknowledged as a
rich people or maybe a ‘tech geek’. All these area have differentiated iPhone
from its close substitute, but not a perfect substitute. iPhone fans, for
instance, are willing to pay more for iPhone. So, when its price increase, the
quantity demanded for iPhone decreases but it does not necessarily decrease to
zero unless the price rises by a large enough amounts. When consumers switch to
its substitutes, the demand curve for iPhone will shift to the left, but not
very significant i.e. decrease in demand. Based on Graph 2, as consumers turn
to alternative smartphones, the demand curve D1 shift to D2.
Graph 2: Substitution effect
As iPhone has the product
differentiation over its rivals who run on Android systems for their
smartphones, Apple can generate high sales. Since iPhone is in monopolistic competition,
iPhone makes a short-run output and price decision just like a monopoly firm
does.
Graph 3: Short run: Economic
profit
Apple maximizes profit by producing the quantity at which marginal
revenue equals marginal cost, millions of iPhone a month and charging the price
of $250 per unit. This price exceeds the average total cost of $100 per unit. The
blue rectangle illustrates economic profit of $750 million per month. (Refer to Graph 3)
Graph 4: Long-run: Zero
economic profit
However, iPhone is not going to gain economic profit for long. Eventually,
its competitors as well as new firms enter the smartphone market as iPhone
makes an economic profit. As consequence, the demand for iPhone decreases as
more firms join the market. The demand curve and marginal revenue shift
leftward. Thus, the profit maximizing quantity and price fall. At the profit
maximization the price change equals average total cost, so economic profit is
zero. In order for iPhone to regain profit in short run, Apple has to launch
new phone to start the cycle again. This means that Apple would have to invent
new phone that even better differentiated so that Apple can compete in the
market with greater sales volume. This situation can be seen when Apple
launched iPhone 5 after iPhone 4S has been in the market for a year in response
to other smartphones like Samsung Galaxy enters the market. (Refer to Graph 4)
Last but not least, I believe that everyone knows that iPhone has been phenomenal to the global market. Demand
for iPhone is mushrooming for every model launched. The success of Apple iPhone
in the phone market is following its power to influence the market for
smartphones. Any potential threats and negative speculations seem not to hurt
Apple badly. Apple indeed is a market leading for smartphones.
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