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Apple’s iPhone is usually priced from $500 to $1000. The price of the iPhone is partially dependant on its production cost, where a positive relationship can be seen between production cost and retail price. Apple is more resource intensive and uses scarce resources in designing and engineering its software and hardware, thus generate expensive smartphones. The estimated cost of materials for the latest iPhone X was $370, while the retail price is $999. On the other hand, the materials for iPhone 8 cost an estimate of $288 and its retail price is $940. Therefore, a higher cost of raw materials leads to a slightly higher retail price, enabling Apple to profit more by selling at a higher price when the cost of production is higher.However, the higher production cost would also result in Apple’s preference to sell lesser at all price levels, shifting the supply curve leftward (refer to Appendix 3), to increase overall prices due to high demand. Hence, there would be a decrease in quantity supplied resulting in equilibrium price to increase.3.2.2 Number of Sellers in the Market There are various companies selling smartphones with big players in the market such as Samsung, Apple and Huawei. Due to higher demand for Apple’s iPhones in recent years, supply increased in order to meet the demand, reaching equilibrium. The demand of consumers are met through the increase in supply, whereby the estimated waiting time for iPhone X has decreased by one week. Overall, there is a large supply of smartphones in the market due to numerous smartphone brands available (refer to Appendix 4). The high demand for smartphones would trigger an increase in supply of smartphones from the various firms.On the other hand, there are no other firms selling smartphones with the iOS software, causing Apple to be the only seller in the market. This results in a loyal customer base who prefer the iOS software, allowing for consistency in the demand for Apple’s smartphones. Although the supply of iPhone is rather high when compared to other brands due to the number of buyers Apple expects for its phones, it is still limited as Apple is the only company offering such phone design and software.4. Elasticity4.1 Determinants of Price Elasticity 4.1.1 Availability of SubstitutesAll Apple’s products use its own operating systems, such as the iPhone’s iOS and the Macbook’s MacOS. With many unique features in its operating systems, it is no doubt that iPhone is highly demanded for worldwide. There are no substitutes for the iOS software as Apple is the only producer and its competitors such as Samsung does not offer the same functions and services. This suggests that the iOS software itself is price inelastic.However, there are many substitutes when referring to smartphones as a whole as there are many other competitor smartphone brands such as Huawei, HTC and Xiaomi in the market. Therefore, indicating that the demand for smartphones is price elastic as consumers have a wide variety of smartphones to choose from.4.1.2 Luxury Services and Portion of Income SpentPresently, it is debatable that smartphones are more of a necessity than a luxury. However, at the end of the day, smartphones are still considered luxurious as its demand increases more than proportionally as consumers’ income rises. Generally, the price of iPhones are exceptionally high when compared to other smartphone brands. The price of the recent iPhone X ranging from $999 to $1,149 takes up about 20.8% of a Singaporeans’ income as Singaporeans’ average monthly remunerations in the third quarter of 2017 is $4,795. Since an iPhone contributes to a large proportion of income spent, it makes iPhone a luxury good.With an iPhone costing about 3.06 times more than any other smartphone brands (refer to Appendix 5), its demand tend to be more price elastic as any changes to the iPhone prices will greatly affect consumers propensity to purchase an iPhone as compared to other brands of smartphones.4.1.3 HabitWithout an Apple ID account storing your personal information, you will not be able to use your iPhone. Apple ID give you access to all Apple related services like the Apple Store and iCloud. The Apple iOS is an operating system that differs entirely from its competitors. Once a user get used to iOS, he is unlikely to change to another operating system as all of his information is kept under his Apple ID, making it a hassle to convert all of them to an Android phone.The uniqueness in iOS had gather a loyal customer base for Apple who are reluctant to switch to other operating systems. As the Apple’ iOS system is being used habitually by users, their next smartphones would highly likely be an iPhone again. Thus, suggesting that its demand is price inelastic as most habitual users will still choose iPhone over other brands, regardless of price change.4.2 Price Elasticity Demand Curve of iPhoneApple’s iPhone is generally price inelastic as seen from the price elasticity curve of iPhone being slightly steep (refer to Appendix 6). However, it being a curve also indicate that iPhone is also price elastic. This is due to the many other substitution available. The high pricing of iPhone also made it price elastic due to the fact that any small change in the prices will bring about a greater change in demand for general consumers.Although expensive, consumers are willing to pay for the quality and functions of an iPhone. As mentioned in the article, Apple is a brand committed in providing world-class products with world-class buying and serving experiences and Samsung cannot beat this. Being the only brand that uses iOS operating system, its price elasticity is strengthen because of its users’ habitual preferences as one who uses iPhone would most likely continue to use iPhone regardless of price change.As seen from the curve, a decrease in iPhone prices would not necessarily affect the demand to a large extend whereby the larger percentage decrease in equilibrium price from P1 to P2 results in a smaller percentage increase in equilibrium quantity from Q1 to Q2. Since iPhone is considered inelastic with |Ed| less than 1, it is on the lower half of the demand curve (refer to Appendix 7). This may result in a decrease in total revenue should there be an increase in price. This caused Apple to be more conscious when setting prices, as it could result in losses should prices increase drastically.4.3 Income Elasticity Considering smartphones as luxury goods, they are referred to as normal goods, making it income elastic with positive elasticity. A small change in income will bring about a more proportionate change in the demand (refer to Appendix 1) as iPhones are generally more expensive than other brands.Thus, when income increases, most would take this chance to purchase an iPhone over other brands for its world-class services, causing its demand to increase. Confirmed by a research done in USA, the richer states tend to use iPhone more, while the lower income states use Samsung more.5. Theory of Cost and ProductionIn the short run, Apple is able to gather profits by outdoing its competitors with its distinct operating system and excellent customer services. This explains the high demand for newly launched iPhones (refer to Appendix 8) and together with the high selling prices (refer to Appendix 5), chances for high short-run profit were given as seen from the demand and marginal revenue curves. In order to get the most out of it, iPhones are produced at profit maximising quantity which was 3 millions where the marginal cost equals marginal revenue (refer to Appendix 9). The then iPhone 4 costed $200, which was double its average total cost.Emerging smartphone brands caused demand for iPhone to drop due to increasing substitutes. As a result, the demand and marginal revenue curves shifted leftward, causing the profit maximising price to fall to $100 at same quantity produced (refer to Appendix 10). This price will continue to fall as diminishing marginal returns set in due to overcrowding and congestion.Therefore, Apple will not continue earning in the long run once the selling price equals the average total cost. Apple would need to come up with better new phones to challenge the market and recapture profit, which it is currently doing, launching a new model after the preceding model has been out for a year.

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