Management Economics: Factors Influencing Demand and Price Elasticity

This document discusses the concept of management economics and its application in decision-making. It focuses on the factors that influence the demand for goods and services, such as the price of substitutes, consumer income, taste and preferences, and consumer expectations regarding price. The document also explores the case of Apple Inc. and its competitors in the smartphone industry to illustrate these concepts.

Management Economics

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Describe the business and its main products & services.........................................................1
2. Identify the factors which influences the demand of goods & services..................................4
3. Identify the factors which influence the price of elasticity......................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
In order to make better and more productive actions, managers should have to done effective
planning. Management economics is defined as the mechanism for integrating various economic
values inside the business operation and service (Brouwer and van der Heide, 2012). On the
other side, management economics is related to the application of economic principles and
critical thinking to rational decision-making issues. The main task is to allow the more efficient
use of available resources such as manpower, capital and property. It has gained attention among
companies in the current period as it encourages the maintenance of comprehensive financial
statements in order to meet realistic sales goals, devise successful strategies and set appropriate
prices.
For a deeper understanding of Apple Inc, company implement several economic principles.
It contains the other economic factors that are discussed, such as demand and supply factors, cost
estimates, pricing, and market policies. Therefore, factors are being established that can
influence demand & supply elasticity in the chosen business context.
MAIN BODY
1. Describe the business and its main products & services
Apple Inc. is an international US based Technology Company which established in
Cupertino, California, United States. This organization established by the Steve Jobs, Ronald
Wayne and Steve Wozniak in 1976. Apple Inc. is recognized for the innovative technologies of
Smartphone, mobile phones, electronic devices etc (Callan and Thomas, 2013). The company
introduced Apple brand in July 1976 that was a standard chipset machine and especially post-
assembled comparison with other machines at the period. The company has a variety of products
like iPhone, iPods, wireless earphones, iPad laptops, smart TVs and fitness watches making it the
leading Smartphone brand in the world. Apple Company’s products are modernized by
understanding the needs and preferences of consumers and technological development, leading
to customer satisfaction and the company's anticipated consistency that meets customers’ needs.
Apple Inc Company selected for this assessment because it is well known or popular
Smartphone brand of the world and also comes under the top five Smartphone brand in the
worlds (Gunasekaran, Subramanian and Ngai, 2019). Price ranges of iPhone products are quite
high and it also has huge demand because of its unique features like Camera quality, external
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body, battery life, storage, processor etc. In addition, product positioning is very well done by the
Apple Inc. in the customer’s mind.
Below mentioned market shares of Apple and its competitors help the customers to
understand the positing of this brand among the Smartphone sector (Top Smartphone’s Market
Shares, 2020). Below mention data and graphical representation provide better understanding.
Global Smartphone Shipments Market Share (%)
Brands 2018
Q1
2018
Q2
2018
Q3
2018
Q4
2019
Q1
2019
Q2
2019
Q3
2019
Q4
2020
Q1
Samsung 22% 19% 19% 18% 21% 21% 21% 18% 20%
Huawei 11% 15% 14% 15% 17% 16% 18% 14% 17%
Apple 14% 11% 12% 17% 12% 10% 12% 18% 14%
Xiaomi 8% 9% 9% 6% 8% 9% 8% 8% 10%
Oppo 7% 8% 9% 8% 8% 9% 9% 8% 8%
vivo 5% 7% 8% 7% 7% 8% 8% 8% 7%
Realme 0% 0% 0% 0% 1% 1% 3% 2% 2%
Others 33% 31% 29% 29% 26% 26% 21% 24% 22%
Global Smartphone Shipments (In Millions)
Brands 2018
Q1
2018
Q2
2018
Q3
2018
Q4
2019
Q1
2019
Q2
2019
Q3
2019
Q4
2020
Q1
Samsung 78.2 71.5 72.3 69.8 72.0 76.3 78.2 70.4 58.6
Huawei 39.3 54.2 52.0 59.7 59.1 56.6 66.8 56.2 49.0
Apple 52.2 41.3 46.9 65.9 42.0 36.5 44.8 72.3 40.0
Xiaomi 28.1 32.0 33.3 25.6 27.8 32.3 31.7 32.9 29.7
Oppo 24.2 29.6 33.9 31.3 25.7 30.6 32.3 31.4 22.3
vivo 18.9 26.5 30.5 26.5 23.9 27.0 31.3 31.5 21.6
Realme – – – – 2.8 5.0 10.2 7.8 7.2
Others 121.8 113.3 110.9 115.8 87.7 92.8 84.7 98.6 66.6
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Figure 1Top Smartphone's Market Shares, 2020
From the above mentioned statistics and graph, it is clearly observed that Apple Inc is
one of the leading Smartphone brand in the world. Market shares of 2019 in the last quarter was
18% but further reduces in the first quarter of 2020 and currently it is 14% (Archer-Brown and
Kietzmann, 2018). Apple Inc has several competitors such as Samsung. Xiaomi, Realme,
Huawei etc. Global shipment of Apple products also decreases in comparison to previous year
and it will happen due to global pandemic which leads to the global lockdown situation to
prevent the Corona Virus (COVID-19) spread.
The consumer demand for smart phones has fall the highest ever, falling 13 per cent in Q1
2020. As of Q1 2014, this is the very first period the Smartphone business has dropped
under 300mn units in a row. The COVID-19 disease interrupted the indications of any
rehabilitation the sector started to emerge in Q4 2019 (Keller, 2015). Samsung did lead the
mobile industry taking one-fifth of smart phone deliveries. Including during the COVID-19,
Apple steadily declined as iPhone shipments during the quarter to only 5 percent. The iPhone
sales for the same time were down 7 percent from YoY. The effect has been moderate for some
countries.
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During the current year, the OEM decreased 18 per cent YoY and is projected seeing a
stiffer decrease in Q2 2020. Huawei kept going its move in China and overtook Apple once more
in the quarter. T he OEM reduced 17 percent YoY and now over half of Huawei's shipments are
in China. Over the fifth, Xiaomi rose 7 per cent YoY. Since Q1 2018, the OEM has managed to
pursue India's mobile industry to its highest market already (30 per cent).
2. Identify the factors which influences the demand of goods & services
Price of Substitutes: Goods that can be used as alternatives instead of others products. In
context of Apple Inc, there are various types of products that can actually affect sales of iPhone
series. Competitors of Apple Inc are Samsung Galaxy Note 9, Mo-5/ pro, Sony Xperia XZ3,
honor 20 Pro, Realme 7, Samsung S10 plus, Google Pixal 3 and some others. A main competitor
is Samsung Company and its market growth rate, which raises Apple’s sales pressure and leads
to a fall in iPhones costs. This handset’s price is already dropping because of high demand. It
impacts iPhone usage as well as other factors including strong backup power, low price
compared to Apple, it influence the overall demand.
Price of complements: When demanded quantity of goods increases then demand for
others increases and it is similar in the situation of price change. In context of Apple Inc, when
price of iPhone increases then its competitor’s price decreases which influence the demand of
Apple Inc. products. But, increase in the price of Apple’s products does not influence the sales of
Samsung because some customers does not care about the changes in price range, they still loyal
for the products.
Consumer income: It is also known as household income where when individual income
increases then they are more capable of spending (Kolk and Rivera-Santos, 2018). So, higher the
income generates more demand and lower the income reduces the overall demand which
influence the Apple Company’s overall demand. On the other hand, higher consumer income
generates more demand for the company.
Consumer taste & preferences: Customer taste and desires: Understanding customer
wants, tastes and preferences when producing products is also very relevant for sellers because it
can better satisfy their demands and preferences that can result in higher sales. Things are
continually evolving in the telecoms industry because of new technologies such as extensible
power use, solar chargers, wide displays, etc. All of these forms of changes will negatively
impact iPhone demand if it seems that manufacturing goods cannot satisfy customer needs.
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Sudden changes in tastes do not impact iPhone productivity and efficiency, since the business is
extremely focused on the latest technological advances.
Consumer expectations regarding price: If organizations unable to meet the consumer
expectations regarding product price, then it will directly affect the demand of Apple’s products.
If company meet consumer’s expectation then demand of iPhone increases and other side, if they
unable to meet the customer’s expected price range than demand of products reduces.
Management should formulate their pricing strategies according to the consumer’s expectations.
Demographic (Population): Apple Inc. covers the entire world, providing a broad range
of products to large customer base for different goods. Each nation is considered to have its own
culture, and each organization has its own choices and needs. This suggests that Apple Inc.
mostly plans the new design on specific times based on specific events or periods in a specific
nation. Additionally, demographic uncertainty would result in a decrease in overall price
of iPhone which decreases the profit margin because of low demand of products.
3. Identify the factors which influence the price of elasticity
Substitute effect:
A luxury products means rise in revenue induces a rise in prices by a greater proportion.
Which means income elasticity of demand is higher than one. HD TV's, expensive mobile
phones, luxury cars etc. would be the perfect for luxury goods example (Mills and Broughton,
2016). Individual spend a higher proportion of their money on the luxurious product as income
increases and vice versa. This factor affect the demand and it is more elastic because demand of
luxury goods and raise in income has positive relation, when one increases then another also rise
which affect the overall demand. Similarly, when consumer income reduces then spending on
luxury items also decline.
Necessary good is a kind of regular products which consumed by consumers on daily
basis. Needed commodities that customers are purchase irrespective of fluctuations in their wage
levels, thereby making such goods less responsive to changes in income. For examples include
buying decisions of specified periods, such as hair styles, habits of having tobacco, day-to-day
essential items such as power and water, and crucial medicine. As on every other usual good, a
rise in wages will lead to increases in demand, but the growth for a necessity good is less than
equal to the increase in revenue, meaning that the proportion of spending on such goods will
decrease as income rises. If demand elasticity of income is less than unity, then it is a strong
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requirement. This hypothesis for food, known as Engel’s theorem said that the percentage of
money spent on food decreases as income increases, even though total spending on food rises.
That allows the market for food income flexible about zero and one.
Luxury and necessary goods both has substitute impact on the demand of goods &
services. In context of the selected organization, Smartphone are luxury items which has high
elastic demand because when consumer income increases then spending on luxury goods also
increases and vice versa (Muda And et.al., 2018). On the other side, demand for essential items
also elastic because when price of product increases demand reduces and when price reduces
then demand automatically increases.
There are some factors which influence the price elasticity of demand in context of Apple
Inc. These factors influence the overall demand of organization. Further discussions are as
follow:
Household income (Consumer Income): This factor affects the sales of Apple products
due to elastic demand. When household income increases, demand also increases and the other
side when consumer income reduces, it will also reduces the individual consumption which leads
to minimise the demand of Apple products and another side reduction in the price of Samsun’s
products will lead to maximise their sales. In this situation, competitors are able to grab this
opportunity through perform accordingly or increase their overall sales.
Number of close substitute: The nearer the alternatives in the market, the demand will
be more elastic due to the competition and customers will find it easy to switch on another
products. In context of Apple Inc, close substitute of this brand has Samsung, Xiaomi, Realme
etc. So consumers can easily shift on another brand if they it more suitable, cost effective or
value for money. Demand is elastic because it can change due to availability of close substitute
of Apple Ins’s iPhone range.
Pricing policy:
In order to maximise their sales or product demand, organizations focusing on their
pricing strategy which is helps in generating more demand or more revenue. Some of the pricing
policies are as follow:
Competitive pricing policy: This pricing method aims to concentrate on the prevailing
selling cost of a company's products or service that they currently sell (Piccarozzi, Aquilani and
Gatti, 2018). It should not include the cost of its goods or services or customer demand into
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account. Company has to set their selling price below their rivals and increase the demand to
maximize profit margin.
Cost plus price strategy: This solution mainly depends mostly on cost of sourcing a
product and service or COGS. It is often known as premium pricing, as firms that use this
strategy "mark up" their products, based on how much they wish to receive. Cost-plus pricing is
generally used for retailers who offer actual products. This strategy is not the best fit for service-
based organizations, as the valuation of their products is extremely higher than the
manufacturing expenses.
High low-pricing strategy: This technique is why a company initially sells goods on the
market at a high price and then sell goods on lowers price when demand for the product declines.
Coupons, sales sites and year-end offers are examples of this pricing technique in practice; this is
why this strategy can often be called a discounting approach. It is commonly used by retail firms
that sell occasional or constantly changing products such as garments, mobile retailers,
accessories, and decoration. Customers value to expect sales and deals, so Black Friday as well
as other discount days here are so popular.
Economic Pricing: Companies also follow this strategy of pricing in order to increase the
selling of specific goods and to attract ever more buyers (Wu, 2016). It also helps to lower the
advertisement and delivery costs by making products available in vast amounts at a common
time of sales.
From the overall discussion on pricing strategy, it has been analysed that Apple Inc.
implement the cost plus pricing strategy which is also called premium price strategy. In this
strategy, Apple introduce their iPhone range with higher selling prices and they specially target
the higher class or high income group people who can spend their money to purchase this luxury
item. Smartphone comes under the luxury items and many people unable to afford, so after some
time when demand of mobile phone reduces, Apple reduces their product price to generate
optimum profit through maintain demand in the market.
CONCLUSION
It has already been noted from above analysis that management economics is a simple
approach of addressing economic situation and challenges with the implement of different
approaches, concepts, and core values. To increase commodity demand, it is critical that
managers analyze the multiple variables that can adversely and favourably impact demand. The
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most successful approach to pricing is targeted at improving price competitiveness and
increasing market share in the new competitive countryside. Pricing strategy should be selected
as per their target audience and also evaluate that, it will fulfil the demand of customers
regarding expected price of goods & services.
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REFERENCES
Books & Journals
Archer-Brown, C. and Kietzmann, J., 2018. Strategic knowledge management and enterprise
social media. Journal of Knowledge Management.
Brouwer, F. and van der Heide, C. M. eds., 2012. Multifunctional rural land management:
economics and policies. Routledge.
Callan, S. J. and Thomas, J. M., 2013. Environmental economics and management: Theory,
policy, and applications. Cengage Learning.
Gunasekaran, A., Subramanian, N. and Ngai, W. T. E., 2019. Quality management in the 21st
century enterprises: Research pathway towards Industry 4.0.
Keller, G., 2015. Statistics for Management and Economics, Abbreviated. Cengage Learning.
Kolk, A. and Rivera-Santos, M., 2018. The state of research on Africa in business and
management: Insights from a systematic review of key international journals. Business &
Society, 57(3), pp.415-436.
Mills, J. and Broughton, V., 2016. Bliss Bibliographic Classification: Class T: Economics
Management of Economic Enterprises. Elsevier.
Muda, I. And et.al., 2018. The Analysis of Effects of Good Corporate Governance on Earnings
Management in Indonesia with Panel Data Approach. Iranian Economic Review, 22(2),
pp.599-625.
Piccarozzi, M., Aquilani, B. and Gatti, C., 2018. Industry 4.0 in management studies: A
systematic literature review. Sustainability, 10(10), p.3821.
Wu, C. L., 2016. Airline operations and delay management: insights from airline economics,
networks and strategic schedule planning. Routledge.
Online
Top Smartphone’s Market Shares. 2020. [Online]. Available Through:
< https://www.counterpointresearch.com/global-smartphone-share/>
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