502 Final Project Part I- Microeconomic Analysis Paper

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Jan 9, 2024

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Apple Inc. provides tablets, computers, smartphones, smart watches, and digital content and is in the consumer electronics, software services and online services industries; the Apple Watch specifically falls into the consumer electronics industry. Apple Inc. employees 2,000,000 people in the US alone and reported 394.33 billion U.S. dollars in revenues in its 2022 fiscal year. The price elasticity of demand for a particular commodity at any price depends, at a minimum, on the following factors: 1) The existence and number of substitutes. 2) The share of a consumer’s total budget devoted to purchases of that commodity. 3) The length of time allowed for adjustment to changes in the price of the commodity. (Miller, 2021) In applying these factors to the elasticity of the Apple Watch we will look specifically at the US, since almost 40 percent of Apple’s total sales are from the US (Shvartsman, 2023). In the US there are a number of substitutes for an Apple Watch, however Apple has taken the time from the very beginning of its company to develop an almost “cult-like” following in its consumers. This makes people very loyal to the brand, despite the presence of substitutes. In the US the percentage of the average consumer’s budget that is devoted to electronics is quite high, and Apple has predicable price increases both in value and in timing due to releasing new versions of it’s products at the same time every year. This means that likely Apple’s price is inelastic, with consumers being unresponsive to price changes. Two non-price factors that impact the demand for Apple Watch would be changes in consumer average income and changes in consumer tastes and interests. When consumers see an increase in income then their purchase of goods increases, likewise if their overall income decreases their purchase, especially of luxury goods, decreases. Consumer tastes and interests also play a factor in demand. Although the Apple Watch is a luxury good it is also technology services. Trends and fads move rapidly in this industry and although Apple has had the good 1

fortune to be at the forefront of many of those trends, the company must work hard to keep Apple products relevant and interesting for their consumers otherwise purchasing might taper off. Two non-price factors that impact the supply of Apple Watch would be a change in international business practices or a change in the cost of inputs. Since Apple Watches are built in China if there were to be any change in the international business regulations around work in China that would impact supply. For example, a regulation increasing wages in China could decrease supply or a regulation decreasing the minimum wage that must be paid could increase it. Additionally, if prices for raw materials increased, this could mean a decrease in supply. When a market is in equilibrium supply meets demand and the prices for goods or services remain the same. The Apple Watch specifically is defined as a luxury product. Because of its loyal customer base, when new Apple products are released there is the immediate appearance of demand outpacing supply, however, this is purely due to people wanting to be “the first” to own the new, updated product. During most of the year, the Apple watch tends to be in market equilibrium and when supply starts to be more than demand Apple releases a newer version, which again gives the appearance of demand outpacing supply for a short time. In reality, market equilibrium is almost always maintained with Apple products. Honestly, I think the best market strategy is one Apple already employs. They have worked hard to establish a loyal customer base that is excited about updates and new products and eager to be the only kid on the block with the new toy. Apple has established a schedule of regular, annual, updates to their products. As long as demand continues to keep up with supply, this strategy seems to have been and will continue to be very effective for Apple. 2

Let us move on to Factors of Production. For this analysis I will look at labor, physical capital human capital. Let’s start with labor. Apple's workforce includes a wide range of professionals, from top-level executives to skilled software developers and programmers, to the dedicated manufacturers who bring their products to life. Under economic terms variable cost are ones that would not be paid if the company suddenly closed, therefore labor is a variable cost. Moving on to physical capital, Apple’s retail stores are their primary physical capital. These stores serve as crucial platforms for distributing and selling their products. They incur expenses such as rent for their retail stores and offices, insurance for the buildings housing these establishments, and maintenance and utility costs. Therefore, Apple's physical capital can be categorized as a fixed cost. Lastly, I will be reviewing human capital as the third key factor of production. Apple devotes a lot of resources to their human capital. Their customer service is widely loved, additionally with new updates every year they must make sure that the employees in their physical locations are knowledgeable about the latest updates and can compare and contrast products for consumers looking to purchase or upgrade. Human capital is, again, a variable cost. Now, what are some things that can impact these factors? Most of Apple’s manufacturing takes place in China but starting 2022 Apple started to move production of it’s MacBook and Apple Watch to Vietnam in order to diversify it’s supply chain. Labor in both China and Vietnam is much cheaper than in the U.S. however, minimum wage has been increasing in recent years. Should the minimum wage increase too much overseas Apple will took to other ways to cut those costs, such as automating more of the process to reduce the labor force. Shifting our focus to physical capital and its impact on production costs, let us delve into the physical stores. An increase in rent might mean that Apple needs to reduce their number of 3

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