Launching of iPhone 5

       Based on the article found in the internet with the title “iphone 5 UK price announced and big price cut for iPhone 4” written by Natasha Lomas on 13^th September 2012 at 8.23am, iPhone 5 is finally released and big price cut for iPhone 4. Apple company had modify the model of iPhone. Now, they  were launching the new model of iphone which is iphone 5 which the features in it had already improved. It has a better camera, with higher megapixels so that the photos capture by it is better and it has a better appearance.

iPhone 5 model starts with £529 in UK for 16 GB,32GB with £699. Apple company also cut down the price for iPhone 4, 4s and also 3Gs. Why is Apple company doing so? When iPhone 5 is released in the market, people will go for iPhone 5 and demand for older model for other iPhones will be decreasing. Although the demand for older model of iPhones are decreasing, still there’s plenty of supply of old models iPhone in the market. If the price is same as the iPhone 5 , then consumers would rather buy the iPhone 5 since there’s better functions in it. Therefore, Apple company to make sure the supply of the old model of iPhone would be sold off, they will be lowering the price.

 When iPhone 5 is released , the demand curve for older models iPhone will shift to the left , quantity of demand will be decreasing. So Apple company will lower the price to meet the new equilibrium of the price. If the firm doesn’t set a new equilibrium, there may be a oversupply of old models iPhone in the market. If there’s  a oversupply in the market, Apple company will face losses because the cost of producing iPhone is not earned back.

But, why the company lower down the price of older model of iPhones, the company will gain revenue and not facing losses? Based on law of demand, price increases, quantity demanded of the product will fall. When the price is lower down, the quantity demanded will increase. Total revenue is calculated with the formula price multiply with quantity. TR=PQ . When price is increasing , quantity demanded decrease, total revenue will also decrease whereas when price falls, quantity demanded increases more than the percentage of price falls , total revenue will increase. The area A represent the total revenue when the price is high, when the price is lower down , the revenue increases ( represent by the area  B) . When price is  £300 , TR is £6000 , when price is  £250, TR is £12500.

Demand elasticities is more elastic than iphone 5 since now everone is demanding for iphone 5. When the demand elasticity is higher, price is lowered down, total revenue will be a big increase.

Based on the given graph, elastic demand gained more revenue when we decrease the price. So, when Apple company decrease the price of older model iphones will definitely wont face any losses but they will be gaining more total revenue.

When  Apple company launched iPhone 5, the stock is finishing very fast. Why is this so? Supposingly , Apple company knew that their product is very demanding in the market. Macbook, iPod, iPad and also iphone is a new  trend in the market. Why not they just launched the number of iphone 5 which the market demanded? Firstly, the company doesn’t want to take risk what if people are changing their taste towards other products, demand for iphone 5 will then drop tremendously, iphone 5 will be oversupplied in the market. The company will then face big losses. Secondly, when the demand is increasing in the market and the supply for it is limited. Therefore, there’ll be a shortage in the market. Therefore, what the entire company will do is they will increase price of their iphone 5 to achieve  new equilibrium price to earn more total revenue.

Why is the firm was so confident to increase the price when the demand of the product is increasing as according to law of demand , price increase, quantity will decrease? Demand elasticity for iphone 5 is inelastic. Why do we say that it’s inelastic? Demand for iphone 5 is influenced by advertisement and friends beside us. A lot of us often wanted to have what our friend has or follow the style of the artist we admire. Iphone 5 is now a trend in the market. Everyone has iphone 5 since it’s so convenient. We can surf net everywhere we want , take pictures , listening to music. Therefore, in my opinion, owning an iphone is already considered as something like a necessities. Demand elasticities for it is more inelastic than a luxuries. Since it is inelastic good, even the company increase the price, the quantity demanded will only drop by a little, total revenue for the company will only be affected by a little. The risk for the company to face losses is very low.If the good itself is elastic, the company might not want to take the risk to increase the price.

When iphone 5 is launched, the demand is so high. The Apple company also produce a lot of iphone accessories for iphone 5. As we all know, iphone 5 size is bigger than iphone 4 and 4s. therefore, people who change from Iphone 4 to iphone 5 definitely need a phone cover. Cross elasticity of demand for iphone 5 and iphone cover is negative figure which they are complement to each other. When demand for iphone 5 increases, demand for iphone cover will also increase. Especially teenagers nowadays, they have a habit to change their iphone covers from time to time. A person may need plenty of ‘clothings’ for their iphones.

Since iphone 5 camera is almost the same function as a normal camera, consumers who is not professional for photography may as well just use the iphone camera. If a camera costs £500 wheareas an iphone 5 costs £600, non professional photographers would rather choose by buying an iphone 5 because it is much more convenient , it’s all in one: making phone calls, surf net, editing pics and also listening music. 8Megapixels camera is sufficient for them as they may just upload it on facebook and doesn’t want to print it out. Even they wanted to print it out the resolutions for the picture can also be good.  Therefore they gives off camera as an opportunity cost. Opportunity cost is second best choice consumers sacrifice in order to have the first choice. Since most consumer will choose iphone 5 rather than camera. The demand for camera will drop, demand curve will shift to the left, price for the camera will drop to have a new equilibrium price in the market. This is to ensure there isn’t oversupply of camera in the market.      

Figure 1.7: Demand for camera

Lastly, I would say that lauching of iphone 5 not only affects the demand for iphone 4 and 4s, cause the price for older models of iphone to decrease but also other products such as camera. Iphone accessories demand may increase in this case.Apple company may make discounts for old models of iphones to ensure the supply of it in the market not to be oversupply.

by:tee mei cheng