MBA502 - Part 1 Final

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1 Part One Final Southern New Hampshire University MBA 502: Economics for Business Sonja Wilson January 1, 2023

2 Supply, Demand, and Market Equilibrium Apple Corporation is a technology company that designs, manufactures and sells computers, tablets, cell phones, smart watches and accessories, along with many related services including several applications. (Apple, Inc., 2021) About 22% of the global market share for smartphones is controlled by Apple, and they also account for 75% of profits in the industry as of 2021. This is all attained by the significant markup on the Apple iPhone. (Brown, 2022) Elasticity Price elasticity is the responsiveness of the price of something due to the demand of it. (Miller, 2021) Due to Apple’s hold on the smartphone industry, there is not as much of an effect as other products. Elasticity would say that raising the price of the iPhone would have a reduction in demand, but this is not the case with the iPhone. However, it is possible that a reduction of price would create an increase in demand. While their greatest competition is Samsung, price could play a large role in consumers choosing between the two companies. Non-Price Demand Factors Price is not the only factor that pushes demand. When it comes to Apple smartphones, there are a couple things that come to mind that would have an effect on demand, like camera quality and alternative payment options. Apple has marketed a newer iPhone by showing that they filmed a commercial with the phone alone. The quality of the camera is shown to be well over the competition. With the current social media influencer craze, having a high quality camera can make all the difference, creating a higher demand for the iPhone for those particular consumers. Smart phones are a big ticket item, with people paying up to and over $1,000 for a cell phone. The Apple iPhone 13 Pro retails for between $999 and $1400. (Brown, 2022). For many, that is a significant expense. Apple and most cellular providers have made iPhone

3 ownership more in demand by offering different payment options. Instead of needing to come up with the full phone cost up front, payments can be spread over several months, up to 24, with no interest. While many cannot afford to pay $1400 up front for a phone, paying around $58 each month is much more manageable. Along with the payment options, they also offer a trade- in deal, which gives iPhone users more reason to stay with Apple because they get credits towards a newer model. (Apple.com) Non-Price Supply Factors Supply shortages can be caused by many factors, including labor shortages and other supply shortages that make producing the iPhone difficult. Apple saw a negative effect on supply during the Covid-19 pandemic, and both of these issues were a part of the overall iPhone supply shortage. There were issues getting necessary components to make iPhones, lack of labor due to government shut downs, and significant shipping delays. This had a negative effect on the supply of available iPhones. (Apple, Inc., 2021) Industry and Market Equilibrium The market equilibrium refers to the point in time that the amount demanded matches the supply. (Miller, 2021) Apple is the leader in the smartphone industry. (Brown, 2022) Because of this, there is typically not any issue with market equilibrium in this industry. During the pandemic, they did end up having more demand than they had supply for, however. That created an increased demand that they were not able to fulfill. This meant that the consumers had to wait longer than anticipated to receive their device. Now that the supply disruptions are clearing up, consumers should have an easier time getting their desired devices, thus bringing Apple, and the iPhone, back into market equilibrium.

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4 Prediction & Decisions Apple has seen what supply struggles can do to their profits. Due to this, it could be predicted that Apple will find alternative ways to manufacture their products, specifically the iPhone, in case of future issues. By understanding the effect that the pandemic had on their supply, they can prepare for future disturbances and prevent the same losses they have seen previously. This will help to reset and maintain the market equilibrium on iPhones. Based on the needs to maintain the market equilibrium, I would recommend finding alternative locations to manufacture the iPhone. As new versions are unveiled each year, the consumer desire to upgrade will remain. If the supply is lower than demand for too long, it could push consumers to the competitors. By having alternate locations, along with back up providers of some of the technology that is needed to make an iPhone, it will help to offset some of the imbalance in uncertain times. As seen during the pandemic, many people turned to social media as a social outlet, and many, if not most, were doing so with their smartphones. Being able to maintain supply for the demand is imperative to keeping the Apple iPhone in the leading position for smartphones. Production and Costs of the Apple iPhone Apple Incorporated makes the iPhone which dominates the smartphone market. The cost to produce the iPhone is around $570, and that includes the labor costs associated. The iPhone is then sold for between about $1,000 and $1500 depending on the specific model and storage options. The costs that go into producing the iPhone come from many areas as discussed below. (Brown, 2022) Inputs and Costs

5 There are many inputs that are associated with producing the iPhone, and they can be fixed or variable costs. Variable costs for the iPhone are labor and the components used to produce them. Fixed costs for the iPhone are the equipment and machinery used in production. While Apple assembles primarily all iPhones in China due to there being a high skillset at that location, the costs remain variable as labor costs can fluctuate. The average salary is $10 an hour, with the top earners making $27 an hour. The components used to make the iPhone can fluctuate as well, as there are always changes in demand. Some of these components are screens, cases, cameras, chips, batteries, etc. (Brown, 2022) During the Covid-19 pandemic, while labor was decreasing from shutdowns all over the world, it made these necessary parts harder to come by. That meant that the cost went up on those items when they were available. Apple saw this occur, both with components needed to product the phones, but also as a producer of an item that became harder to provide due to the conditions and lack of available labor. (Apple Inc., 2021) Apple has fixed lease obligations for equipment and facilities for manufacturing. (Apple, Inc., 2021) These flow into the cost to produce the iPhone, but as a fixed cost. The largest piece of this for the iPhone is the equipment used to build each phone. There is a portion of the manufacturing process that is done by robots, and the cost of the machinery itself is considered a fixed cost, whether paid at once, or financed. Analysis of Factors The costs that go into producing each iPhone can vary based on current market conditions. A great example of this is during the Covid-19 pandemic, the lack of working employees due to shutdowns caused shortages of many components needed to make the iPhone. (Apple, Inc., 2021) This in turn meant that the cost of the components went up, increasing the cost the make the iPhone. Another factor that could affect the cost, would be labor costs. If

6 Apple decided to move all production to the United States, the costs associated with labor would likely greatly increase, therefore making the cost to produce the iPhone increase as well. (Brown, 2022) Lastly, if the equipment used to manufacture the phones broke down, or had to be replaced altogether, Apple would need to spend extra money to repair, replace, or use human labor to make up for it. This would obviously also cause a significant change in the cost to produce the iPhone. Ultimately the cost to make the iPhone increasing would reduce the profit margin on every iPhone sold. Another piece to this not discussed above, would be if there was an issue with manufacturing that caused the iPhones to be produced with defects. This would likely be caught by the quality control staff, but could still cause a loss in product and ultimately a hit to the profit. The costs to make up for the defective products, would then offset the product that was not defective, making their cost to produce significantly higher. Production Decisions Apple should ensure that there are proper protocols in place to prevent changes in the cost to produce the iPhone. One of the recommendations would be to purchase larger amounts of the components needed with each order. This can create both an excess to fill gaps when supplies are harder to come by, but also reduce costs up front when purchasing in larger quantities. There should also be alternative suppliers on hand in case there is a need to get additional components that are not available from the main suppliers. They should also ensure that quality control checks are being done throughout the production process to prevent the loss of product, components, and time. While planning for labor cost issues is not as easy to do, having a plan for employees ahead of time can help to alleviate some of the unknowns. Setting specific dates for evaluation of pay, budgeting annually for potential increases, and increasing

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7 employee satisfaction to prevent turnover can all assist in this area. Lastly, ensuring that equipment is being maintained properly will both lengthen the life of the machines, but also prevent unexpected breakdowns. There should also be protocols in place for if a piece of equipment did go down, like ensuring that employees are taught how to manually complete the tasks the equipment does to lower the impact on production. By using these protocols, the likelihood of significant increase to costs would be far less plausible. Market Structure Apple, Inc. is an oligopoly, which can be defined as “a market structure in which there are very few sellers,” and “each seller knows that the other sellers will react to its changes in prices, quantities, and qualities.” (Miller, 2021, p. 713) This is fitting because there are only a handful of cell phone makers that are competitive with the iPhone, and they do consistently are in competition with cell phone features and capabilities. This market structure also applies to their computers and laptops, smart watches, and other accessories for the same reason. The amount of competition is small, but there is steady competition that consistently pushes new features and capabilities. Being an oligopoly affects the financial performance of Apple because it means that they have better control over their profits in the long run. Since they hold such a large part of the market, they can use that data to ensure that their losses stay minimal. For the iPhone specifically, they have the necessary data to determine and meet supply and demand for new products. As seen in the table below, as the net product sales increase, so does the net income, and the percentage of net income remains quite similar. (Apple, Inc., 2021) This shows that Apple is not having excess losses due to producing too many products for the market and is staying stable with supply and demand.

8 2021 2020 2019 Net Income (in millions) 94,680 57,411 55,256 Net Sales (products only – in millions) 297,392 220,747 213,883 Percentage of Net Income 31.8 26 25.8 Possible Changes Changes in the industry of cell phones could have an effect on Apple and the iPhone specifically. In an oligopoly, things could greatly change if the competitors began leaving the market. If there were no longer any competition, Apple would then enter a monopolistic market. They would likely see a significant increase in income and sales but could potentially slow their release of new products and features without that level of competition. Another change that could affect them is if a significant number of new competitors entered the market. They could bring new and unseen technology that enticed customers to leave Apple, which could decrease the market lead they have and create a perfectly competitive market. Not only could that affect their sales, but it could significantly impact their net income if they did not plan for a reduced supply and demand situation for their product. Their expenses and losses could grow significantly and create a negative situation financially for the company as a whole. Conclusion Currently, Apple holds the market smart phones over the few competitors. They consistently release new products and features, and have healthy competition to continue to

9 improve their product offering. They carefully look at the supply and demand to ensure they are making proper decisions about how they produce their products, and the most cost-effective way of doing so. By making sure they maintain a healthy market equilibrium they ensure their profit margins stay positive and the company can continue to grow and lead the market with their products.

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10 References Apple.com. (2022). Apple Card. Retrieved from: https://www.apple.com/apple-card/monthly- installments/ Apple, Inc. (2021). Apple Inc. Form 10-K. Retrieved from: https://s2.q4cdn.com/470004039/files/doc_financials/2021/q4/_10-K-2021-(As- Filed).pdf Brown, Rachel. (2022). The cost of making and iPhone. Retrieved from: https://www.investopedia.com/financial-edge/0912/the-cost-of-making-an- iphone.aspx#:~:text=The%20iPhone%2013%20Pro%20retails,costs%20only %20%24570%20to%20make . Miller, Roger Leroy. (2021). Economics Today . 20 th Ed. Pearson Education, Inc.

MBA502 - Part 1 Final

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