Business Economics: Price Elasticity of Demand and Market Failure

This report discusses the concepts of price elasticity of demand and market failure in the field of business economics. It explores the determinants of price elasticity for Apple iPhone and the impact of data roaming charges as a market failure. It also examines the use of tax or subsidy and the social and ethical responsibility of organizations. The report concludes with an analysis of macroeconomic trends and the concept of aggregate demand and supply.

BUSINESS ECONOMICS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART A MICROECONOMICS......................................................................................................3
Price elasticity of demand and its understanding........................................................................3
Main determinants of the price elasticity of demand for Apple iPhone......................................3
Price elasticity of demand............................................................................................................4
Perfectly Competitive Market Model..........................................................................................4
Rebranding strategy and its effect...............................................................................................5
PART B MICROECONOMICS......................................................................................................5
Supply and demand......................................................................................................................5
Data roaming charge as a market failure.....................................................................................6
Use of tax or subsidy...................................................................................................................7
Social and ethical responsibility..................................................................................................7
PART C MACROECONOMICS....................................................................................................8
Trends..........................................................................................................................................8
Aggregate demand and supply...................................................................................................10
Change in aggregate supply.......................................................................................................11
Aggregate demand and supply and Brexit.................................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Economics can be studied at a micro level i.e. at an individual level or at a macro level i.e.
at the level of the entire economy as a whole (Burke, Genn-Bash and Haines, 2018). In this
report, the different factors of the microeconomics such as price elasticity of demand, factors
affecting elasticity etc. will be determined and the certain concepts related to macro economics
such as aggregate demand and supply etc. will also be ascertained. The report will evaluate the
situation of market failure and discuss the imposition of data roaming charges on the EU and the
steps that can be taken to minimise its negative impact on economy will be stated.
MAIN BODY
PART A MICROECONOMICS
Price elasticity of demand and its understanding
Price elasticity of demand shows that at changing levels of the price, what is the responsiveness
of the demand i.e. how responsive demand of a particular product is in accordance to the
changing price levels (Guiso and et.al.,2017). It helps the firms in determining an appropriate
pricing level for their product while launching then in the market so that they are able to price
their product in the market appropriately.
It is necessary for brands like Apple to evaluate the price elasticity factors because the company
has a brand image of selling expensive phones, and they have been known to increase the price
of their iPhone with every new version or model. This has led to the decrease in the sale of their
latest phones such as iPhone 11 because the prices were too high at $1000 and the features are
not as advanced. This led to decreased number of people choosing iPhone 11 but another product
iPhone XR that was launched at $750 was a greater success. This shows that the price elasticity
is important for the company to understand that how much a customer is willing to pay for the
product and then charge the price accordingly.
Main determinants of the price elasticity of demand for Apple iPhone
The determinant of price basically include four major factors i.e. Substitutability, time, income
and nature of good i.e. luxury goods or necessity goods. In case of Apple, the main determinants
are nature of goods and the substitutability i.e. the elasticity of the price depends on these two
factors and gets affected by these as well (Sakuma and et.al., 2019). When the price elasticity of
the iPhone gets affected by the substitutability factors, it shows that what is the preference of
customers for other products that are falling within the same price range i.e. Google's Pixel

Smartphones, Samsung's Smartphones with similar features. The consumers have started to
prefer these products because they are providing similar or more features despite having a lower
price range. Thus this is the manner in which substitutability has affected the price elasticity
where Apple has been forced to either price its product at a lower range or give more features.
Another factor which is nature of goods i.e. the iPhone is perceived to be a luxury
product and therefore, majority of the buyers done even look at it as the option (Becker, 2017).
This was the major cause behind the launching of entry level iPho9nes that were priced at $700 -
$750 and further reducing the price of existing products such as selling iPhone 8 at $450 which
were the strategies that were adopted by the Apple because of the over pricing of their products
in the market and wrong perception of the consumers regarding their product.
Price elasticity of demand
It can be calculated in following manner:
Price elasticity = (% change in quantity)/ (% change in Price),
where,
% change in quantity = (old quantity – new quantity)/ [(old + new quantity)/2]
% change in price = (old price – new price)/ [(old + new price)/2]
Therefore, the price elasticity for Apple's products will be:
% change in quantity= (10-14)/ [(10+14)/2]
= -0.33
% change in price = (700-525)/ [(700+525)/2]
= 0.28
Price elasticity = -0.33/0.28 = -1.17
In the current case of Apple, it can be clearly stated that the demand o the goods is elastic i.e.
elasticity in demand occurs only when the % change in quantity is more than the % change in
price and in the current case it is 1.17 i.e. price elasticity is more than 1 which shows that the
demand is elastic in nature.
Perfectly Competitive Market Model
The perfectly competitive market can be determined on the basis of certain features such
as large number of buyers and sellers, homogenous products, no barriers in entry or exit etc. and
also, the forms are characterized to be price takers rather than price makers because even a slight
deviation in the prices might make the consumer shift form one company to another company.

The current product launched by Apple i.e. Apple Arcade is a exclusive gaming zone that
will give access to as many as 100 games that will be available exclusively to the users of the
Arcade only that will be available at the subscription of $5 per month. The gaming industry does
not have any major entry barriers since all it requires is a good gaming software and then the
company can easily invade the market (Barzilai, 2016). All the gaming companies are operation
on same basis i.e. the experience of the gaming is similar in the product given by different
companies however, Apple can still establish itself on the basis of lower pricing at just $5 per
month and due to the brand name and extensive promotional activities, it becomes easier to
invade the market thus establishing themselves.
Rebranding strategy and its effect
Under their rebranding strategy, the company has developed a separate range of its Pro
products which involve products with the highest prices and this helped the company in creating
a separate brand image for its cheaper and more accessible products.
By the helps of launching a separate line of their expensive products, Apple has been able
to developed different marketing strategies for both the product lines and this has further
simplified the process of targeting the consumers to the brand. Additionally, this has also helped
in bringing to forefront the cheaper product of the Apple company such as iPhone XR etc. Apple
has always focused on giving excellent quality and featured product within the limited price
range and this has made the company earn a huge reputation but their products are always priced
averagely higher than other competitor products (Brim, 2017). Also, launching of an exclusive
range of shows, entering gaming zone, modifying the Apple Watches are noteworthy attempts in
entering into different market segments.
Therefore, rebranding is immensely useful to Apple in targeting a separate consumer base
and also creating a different brand image of presenting affordable products as well along with the
expensive ones.
PART B MICROECONOMICS
Supply and demand
Due to implementation of the data roaming charges on the mobile phone networks when
they move out of the boundary of European Union signifies that there is increase in the mobile
phone bills of the consumers as soon as they move out of the range. This shows that the demand
of the mobile phone networks will decrease because consumers will try to avoid taking those

networks that are charging data roaming even if it was abolished initially. The diagram below
shows that as the price of having a mobile network will increase, the demand for such networks
will automatically decline (Marwala and Hurwitz, 2017). Similarly, this increase it the source of
mobile falls and consequent decrease in the quantity demand will also lead to decrease in the
supply of the quantity that is being supplied of the products i.e. mobile networks. Ultimately this
will turn out to be a loss making situation for the suppliers only as the customers will deviate
from their products and find other alternatives.
Data roaming charge as a market failure
Market failure can be termed as that situation where the inefficient distribution of the
goods and services leads to the irrational outcomes in the economy. The current situation where
the European Union stated that the data roaming charges was a sign of market failure is correct
because the unnecessary implementation of costs on the consumers is a sign that the government
is unable to give adequate services t their consumers i.e. it is a public good to give services to the
residents of the UK (Azevedo and Leshno, 2016). The implementation of the charges on such
public goods shows that the government is unable to give free services to the public and is
treated as a sign of failure. Therefore, the European Government treated this as a sign of
Illustration 1: Decrease in Demand Illustration 2: Decrease in Supply

negative impact of the economy of EU and therefore, in order to discourage the consumers
developing a negative perception about the economy,
Use of tax or subsidy
Government has the option to grant aid, taxes or subsidies when the situation of market
failure arises and this can help in developing effective solutions to meet the current situation of
market failure and address the problem of market failure i.e. address the causes which are
leading to market failure (Labandeira, Labeaga and López-Otero, 2017). In the current situation
the government could have used subsidies or taxes but this is not the correct measure in the
current case since the implementation of taxes or subsidies should be done when the market
forces cannot be controlled. In the current case, government should rather develop regulations
which will help them in making it mandatory to give free services to the consumers of the mobile
phone network even when they step out f the boundary of European Union.
The government has already developed a regulation that free services would be
applicable form the 15th June and this is the correct measure rather than giving unnecessary
subsidies or implementing taxes on the data roaming charges.
Social and ethical responsibility
The organisations, must exercise ethicality in all its operations and in the current case of
data roaming as well, the implementation of charges was not a part of good ethics and showed
the greedy nature of the data network operators (Miller and Alberini, 2016). The implementation
of data roaming charges was just another step towards the increasing the unnecessary costs and
this increased cost was the direct contrast toward the social and ethical responsibility that must
be followed.
The concept of social responsibility states that the organisations have certain duty towards
the society amongst which it is operating and form which the resources are being derived.
Similarly, the ethical responsibility is the one where it is expected that the organisations will do
what is right and correct thing to do (Soderbery, 2015). Implementing data roaming charges was
the violation of both of these responsibilities because it was purely a tactic to make the
consumers pay more for the utilisation of services that should have other-wise been free for the
users.

PART C MACROECONOMICS
Trends
The trend of the UK’s economy regarding all the three factors can be observed using the FRED
chart below:
All the three charts above collectively depict that the real consumption along with the real GDP
in economy has effectively grown in the past years where they have regularly shown a an
Illustration 3: Real Consumption of UK
Source: Real Consumption Expenditures in the United Kingdom, 2017
Illustration 4: Real GDP of UK
Source: Real Gross Domestic Product for United Kingdom, 2019
Illustration 5: Recession Table
Source: Recession Bars, 2019

increasing trend. This rise in the real consumption and the real GDP shows that the economy of
UK has continuously progressed from the year 1995 (Real Consumption Expenditures in the
United Kingdom, 2017). While the consumption of the economy of UK increased form 7 to 12
million, the real GDP also increased from 2.4 to 4.8milion form the year 1995 to the year 2018
(Real Gross Domestic Product for United Kingdom, 2019). The graph of recession shows that it
has been an ongoing process and despite its regular increase and decrease over the past years, it
can be concluded that GDP of UK’s economy has still risen thus showing that with time
consumption has increased whether the recession in the market was high or not.
Aggregate demand and supply
Aggregate demand and supply depicts the aggregate i.e. the total demand and supply in an
economy.
Illustration 6: Aggregate demand supply model
Collectively both aggregate demand and supply show that what is the demand of all the products
in an economy and what is the supply level of all the products in an economy (Friedman, 2017).
The above graph shows that the real domestic output i.e. real GDP is depicted on the x-axis and
the price level is on the y-axis. It also depicts the equilibrium point at which the aggregate
demand is equal to the aggregate supply and the consumers are satisfied.

Illustration 7: Inflation due to increasing AD
But the increase in the aggregate demand leads to movement of these graph of AD due to the
increasing price levels rather than the decreasing level (Burke, Genn-Bash and Haines, 2018).
This can also be termed as the ratchet effect, where there is only one direction movement i.e.
prices keep getting higher s demand keeps increasing. This leads to continuously rising inflation
in the country and the AS also remains stagnant or there is no significant increase in the supply
thus creating the situation of inflation where demand is high, prices are higher but supply is not
enough.
Change in aggregate supply
The change is aggregate supply model can help in effectively meeting the problem of inflation in
an economy (De Janvry and Sadoulet, 2015). This will automatically increase the supply of the
goods that are being demanded and therefore, prices will again fall down due to competitive
pricing thus addressing inflation.

Illustration 1: Increase in AS
As it can be seen from the diagram above, when the aggregate supply increases from AS to AS1,
there is an increased supply of the goods that are being demanded in the economy and this
automatically leads to the consumers finding the goods that they require. This leads to restoring
of the price in the economy by the helps of market forces and thus an increase in AS can be used
as an effective tool in solving the problem of inflation in an economy.
Aggregate demand and supply and Brexit
The Brexit has impacted the economy of UK heavily where the prices have soared overall
and the demand has not matched the expectations of the industrialists. It can therefore be
concluded that Brexit has negatively impacted the economy of UK while comparing it to the
growth of the economy earlier when it was a part of EU (Johnson, 2017).
The model of Aggregate demand and supply, very accurately use the real GDP which helps
in determining what is the consumption level of the economy at different price levels and this
can correctly help in estimating that has been the tendencies of the consumers in UK showing
that prices have unnecessarily increased and demand has not matched the supply thus creating a
situation of disequilibrium in the economy.
CONCLUSION
The research above helps in concluding that the factors of micro and macro economics are
very important part in determining how the companies operate and the entire economy and its
impact on the performance of such companies. The report helps in identifying what are the major
price elasticity factors that Apple should take into consideration and also discussed the issue of

implementation of data roaming charges by the network operators of EU. The report also
concluded that how the model of aggregate demand and supply can be studied to address the
problem of inflation and its impact on the manner in which economy operates.

REFERENCES
Books and journals
Azevedo, E.M. and Leshno, J.D., 2016. A supply and demand framework for two-sided
matching markets. Journal of Political Economy .124(5). pp.1235-1268.
Barzilai, J., 2016. Supply and Demand Equilibrium and Debreu’s Theory of Value.
Becker, G. S., 2017. Economic theory. Routledge.
Brim, O., 2017. The economic theory of representative government. Routledge.
Burke, T., Genn-Bash, A. and Haines, B., 2018. Competition in theory and practice. Routledge.
De Janvry, A. and Sadoulet, E., 2015. Development economics: Theory and practice. Routledge.
Friedman, M., 2017. Price theory. Routledge.
Guiso, L and et.al., 2017. Demand and supply of populism. London, UK: Centre for Economic
Policy Research.
Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.
Labandeira, X., Labeaga, J.M. and López-Otero, X., 2017. A meta-analysis on the price
elasticity of energy demand. Energy Policy. 102. pp.549-568.
Marwala, T. and Hurwitz, E., 2017. Supply and Demand. In Artificial Intelligence and Economic
Theory: Skynet in the Market (pp. 15-25). Springer, Cham.
Miller, M. and Alberini, A., 2016. Sensitivity of price elasticity of demand to aggregation,
unobserved heterogeneity, price trends, and price endogeneity: Evidence from US Data.
Energy Policy. 97. pp.235-249.
Sakuma, H and et.al., 2019. Supply and demand adjustment system, supply and demand
adjustment method, and supply and demand adjustment program. U.S. Patent
10.181.737.
Soderbery, A., 2015. Estimating import supply and demand elasticities: Analysis and
implications. Journal of International Economics. 96(1). pp.1-17.
Online
Real Consumption Expenditures in the United Kingdom. 2017. [Online]. Available through: <
https://fred.stlouisfed.org/series/RLCMEXUKA >
Real Gross Domestic Product for United Kingdom. 2019. [Online]. Available through:
<https://fred.stlouisfed.org/series/CLVMNACSCAB1GQUK>
Recession Bars. 2019. [Online]. Available through: < https://www.data-planet.com/recession-
bars-now-available-data-planet%E2%84%A2-statistical-datasets>
13