MAE101 – Economic Principles

Learning Outcome Details (part 1)

Unit Learning Outcome (ULO)  

ULO 1:  Describe, analyse and apply key microeconomic concepts  

ULO 2: Explain, present and interpret economic tools  

Part 1: The economics of the Apple iPhone X

Apple has recently introduced the iPhone X, a premium phone with many new features, at a significantly higher price than the iPhone 8, which was released at much the same time. As a result, the iPhone average sale price increased. The release of the iPhone X was a change from previous releases, when new versions of the Apple iPhone tended to be launched at much the same price as older versions had been. Although the quantity of (all) iPhones sold in the first quarter of 2018 fell from 78.29 million (Q1, 2017) to 77.32 million (Q1, 2018),  Apple’s revenue has increased. (Gartenberg, 2018)

i)Explain intuitively why Apple’s revenue has increased after the average sale price increase, even though the quantity sold fell.

ii)Given that the average sale price of an iPhone increased from $694 in Q1 2017 to $796 in Q1 2018 (Gartenberg, 2018), calculate the price elasticity of demand for Apple iPhones.    

iii)Draw a representative demand curve for Apple iPhones, which is consistent with your answer to part ii above. Label each relevant point on your diagram and give it a heading. Explain your diagram fully, including discussion (linked to the points indicated in your diagram) about price, quantity and revenue, and how the diagram illustrates/fits in with  your answer to part i. Note, only one demand curve is required – treat iPhones as one good, rather than looking separately at iPhone X and iPhone 8, using the average sale price.

iv)Now assume that Samsung brings out a competing model to the iPhone X. Redraw your diagram from part iii, and work further on it to Illustrate this scenario. Assume that the supply curve for iPhones is a standard, upward sloping curve and clearly indicate any changes to demand, supply, quantity demanded and/or quantity supplied.  What will happen to the equilibrium price and quantity sold of iPhones? Explain your answer, linking your explanation to your diagram.

Note: for the purposes of this question use the simplifying assumption that the market for mobile phones is perfectly competitive. Ignore international dimensions – you do not need to include any discussion about international trade – assume a closed economy.