Business Economics: Price Elasticity of Demand and Market Failure

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.