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Micro economics assignment Ipad Apple_shubham singhal


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Micro economics assignment Ipad Apple_shubham singhal

  1. 1. Micro Economics Project Report On iPad Submitted by: Shubham Singhal 80303120053
  2. 2. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 2 iPad About the product: The iPad is a tablet computer designed by Apple. It was made for the purpose of making a new product that falls between the computers (laptops) and the mobile smart phones. Its USP is its small size i.e. hand held portable device, light weight, thin, attractive and multi utility product. Initially its purpose was for music, movies, internet, e- books and games but now it has really grown into a complete product by itself. Apple has a history of shocking and pleasing the world with its out of the box thinking, innovation and thus great products. Iphone was a huge hit in the markets, following which Steve Jobs, ex- CEO of Apple released the first iPad in April 2010. The iPad was then followed by iPad 2 and iPad 3 in the subsequent years due to the great market demand and response. The iPad comes in various models depending on the storage capacity and the Wi- Fi and cellular models i.e. with or without the 3G connectivity. It runs on the iOS – operating system, the same OS on which the Iphone and the Ipod touch runs, of which iOS 5 is the latest and the most advanced OS for the handheld devices. There are millions of applications that run on this OS enabling the user for a large number of purposes like gaming, video editing, clicking photos, social networking, news, online banking, online ticket booking and payments, video chatting etc. Also, millions of developers develop these apps which are then
  3. 3. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 3 verified and put on the online store of Apple- App Store from where the users then download and rate these on the App Store. History of the product In the year 1993, Apple launched its first tablet computer the Newton MessagePad 100. It was followed by a number of Newton-based PDAs and the last one was the MessagePad 2100, which was discontinued in 1998. Apple then re-entered the market of mobile- computing in 2007 with the launch of the revolutionary iPhone by the then CEO- Steve Jobs. It is a mobile phone with screen size smaller than that of the iPad, and it had a camera too. It had the new features like the multitouch finger-sensitive touchscreen interface running on Apple's iOS mobile operating system. Actually, the employees at Apple were working on the development of a tablet first but then decided to launch the iPhone first, which is of smaller screen size because same concepts would be applicable there as well. The internal code name of the iPad was K48. "Apple's tablet" was a much talked about thing at the time of end of 2009. Names like iTablet and iSlate were also given to it. To end the rumors and to launch the Apple’s actual product, on January 27, 2010, Steve Jobs at an Apple’s press conference launched the iPad at the Yerba Buena Center for the Arts in San Francisco. In Star Trek, PADD a fictional device was used and the iPad looks similar to it, thus the name is given in admiration to the former. - Steve Jobs showing the iPad at its launch
  4. 4. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 4 Significant Developments At the recent WWDC 2012 event Apple showed iOS 6, the latest version of the Apple’s mobile devices operating system. New features included are:  FaceTime over 3G  Call Rejection and Reminder  Siri now supports newer languages  Do Not Disturb mood  VIP Mail Market Size Apple sold 3,00,000 units of the first iPad on the first day itself in April 2010. During 2010, Apple sold 14.8 million iPads worldwide. By the release of the iPad 2 in March 2011, more than 15 million iPads had been sold, selling more than all other tablet PCs combined since the iPad's release. iPad’s Market Share Apple's share of the tablet market was 68 per cent in 1st Quarter of 2012, much better than its competitors like Samsung, Asus, and BlackBerry. Apple shipped 11.8 million iPads during the quarter (1st Quarter of 2012), a down from 15.4 million units in the fourth quarter of 2011. Thus its worldwide share raised from 54.7 per cent in Q4 of 2011 to 68 per cent in Q1 of 2012.
  5. 5. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 5 Source: The iPad runs on the Apple’s OS for mobile devices- iOS. It is the best OS thus making iOS very popular. Market share on the basis of users using the various operating systems on the mobile devices is as follows: Source: Competitors of iPad As the competition is beefing up, the market for Tablets is dominated by 4 players - Apple iPad, Samsung Galaxy Tab, Blackberry PlayBook and Google Nexus 7. Its top most competitor being Samsung Galaxy Tab, Ipad still manages to have a high market share due to the brand value of Apple and its distinguished features. Recently Apple has won a lawsuit over Samsung and it has been found that Samsung products violated Apple patents and has won 1 billion $ in damages.
  6. 6. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 6 Product lines 3 iPad’s have been released till date as per the ‘generations’ differentiated in brief as below: Model iPad (original, discontinued) iPad 2 (2nd generation) iPad (3rd generation) Announcement date January 27, 2010 March 2, 2011 March 7, 2012 Display Multitouch display at a resolution of 1024 × 768 pixels Multitouch display at a resolution of 2048 × 1536 pixels Processor 1 GHz Apple A4 system on a chip 1 GHz (dynamically clocked) dual- core Apple A5 system on a chip 1 GHz (dynamically clocked) dual- core Apple A5X system on a chip Memory 256 MB DDR RAM built into Apple A4 package 512 MB DDR2 (1066 Mbit/s data rate) RAM built into Apple A5 package 1024 MB DDR2 Storage 16, 32, or 64 GB Environmental sensors Accelerometer, magne tometer Accelerometer, magnetometer, gyroscope Camera Back N/A 720 p HD still and video camera 1080p HD still and video camera 0.7 MP 5 MP Front N/A VGA-quality still and videocamera, 0.3 MP Source:
  7. 7. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 7 Demand In economics, demand is the desire to own anything, the mere to purchase a commodity is demand, the ability to pay for it, and the willingness to pay during a specific period. Basically Demand refers to how much (quantity) of a product or service is desired by buyers. The iPad is a luxury product and is in high demand buy the consumers because of its high build quality and the number of features it provides. Right since the day it was launched, it has been in very high demand, since it is a very desirable product because it is very much able to cater the demands of the customer as a complete product. Another main reason for it to be in high demand is that its class apart from its competitors i.e. no other tablet is near to what the Apple iPad has to offer to the users in terms of experience, technology and customer satisfaction. People use it for:  Entertainment  Educational purposes  Doing their daily work like writing notes, making to do lists  Reading ebooks  Internet browsing  Gaming  Communicating with friends and family  Checking emails Etc. Over the years, the demand for the iPad has increased since the desirability of the product is high.
  8. 8. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 8 Factors affecting demand of iPad  Many substitutes of the iPad with competitive specifications and prices are available in the market. Price comparisons of iPad and its substitutes: iPad Rs. 30,500 HCL ME Tablet U1 Rs. 7999 Lava E-Tab Z7H (Grey) Rs. 5499 Samsung Galaxy Tab 730 (Pure White) Rs. 20999 Lenovo IdeaPad Tablet K1 (Red) Rs. 19249 ViewSonic ViewPad 7e Rs. 11550 Zync Z990 Plus Tablet Rs. 6990 These are the substitutes which affect the demand of the iPad.  Income of the buyers, represents the buying power of the buyers.  How much technologically packed iPad is, i.e. how strong the product is as per the market standards like the configurations of its components (camera, connectivity, processor etc.).  Difference in the different models of the various models of the iPads (iPad 1, iPad2, iPad3).  Brand Image: the brand value of Apple is very high i.e. the Apple products are in high demand, many people using different Apple product often tend to buy the other products Apple has to offer like an iPhone user or a iMac user tend to buy and iPad as well and the vice versa. This is because of the brand image of the company and the quality products it offers.  Advertising campaign: Advertising of the iPad is really helpful in creating an interest amongst the people and thus an increasing demand of the product. Apple has floated a number of iPad advertisements on the internet and television. Infact, the availability of the iPad in the stores of Apple and other vendors where people come and see how it feels to actually hold and feel the device in their hand. This has resulted in a high demand of the iPad.
  9. 9. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 9 Price elasticity of demand The elasticity of demand measures how much the quantity demanded response to change in price. The demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. The demand is said to be inelastic (as explained below). The formula for computing elasticity of demand is given by: (Q1 – Q2) / (Q1 + Q2) (P1 – P2) / (P1 + P2) In general, Apple iPad is a luxury good, whose elasticity (ed) is less than ( < 1 ) one. That is change increase in price of iPad would merely affect the quantity demanded hence its elasticity is less than one. Supply The law of supply states that (all other things unchanged) an increase in price results in an increase in quantity supplied. This means that producers are willing to offer more products for sale on the market at higher prices by increasing production as a way of increasing profits. As in the case of iPad, there is a huge increase in the sales of the company Apple as it proves there was a huge growth in demand. Since there is a huge growth in demand, which led to an increase in the sales. So it can be derived that this increase in sales was supported by huge increase in supply of the products of the company. Quarterly Sales: Quarter Sales April 8, 2010 450,000 July 21, 2010 3.27 million Sept. 2010 7.5 million Jan. 18, 2011 14.8 million March 2011 19 million June 2011 25 million October 2011 32 million January 2012 50 million April 2012 67 million
  10. 10. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 10 Graph: As seen from the graph above, the sales of iPad have been going up each quarter inspite of its price being constant, this is because of the increase in:  PDI- personal disposable income, i.e. people’s purchasing power has increased, and since the ‘demand is backed by the willingness to pay’, the demand of the iPad has increased. People have started spending more on luxury products.  Growth in service sector of people in the last few years. Thus more and more people want the iPad and are even willing to pay for it. Also, since the iPad through its constant developments and added features, many people from various fields and departments wish and demand for the same. Like iPad is now very much required by students, researchers, medical practitioners, businessman and musicians due to its portability and on the go features. 0 10 20 30 40 50 60 70 80 April 8, 2010 July 21, 2010 Sept. 2010 Jan. 18, 2011 Mar-11 Jun-11 Oct-11 Jan-12 Apr-12 Sales Sales S a l e s i n m i l l i o n s 32 25 19 14.8 7.5 3.27 .45 0
  11. 11. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 11 Complementary products of iPad: The complementary products of iPad are:  Paid applications: The apps are one of the main things on the iPad. There are both free and paid apps which can be downloaded and used from the App Store. The paid apps need to be purchased form the app store and since these are used on the iPad and both go together, it’s a complementary product to the iPad.  The iPad cover: it’s a revolutionary innovative product in itself since its one of its kind. Its magnetic that clings on to the iPad and is easy to use. It protects the screen of the iPad and is foldable thus provides a support while watching videos or surfing the net while working on the iPad. It also comes in many attractive colours.  iPad accessories like the Apple iPad Dock, earphones and the headphones, wireless speakers. Points to be noted about the complementary products of iPad are  An increase in demand for iPad would cause an increase in demand for the paid applications, the iPad smart cover and its accessories.  Cross elasticity demand (XED) value is always negative for complements.
  12. 12. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 12 Production function: A production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs. This function is an assumed technological relationship, based on the current state of engineering knowledge; it does not represent the result of economic choices, but rather is an externally given entity that influences economic decision-making. It can be represented as:- P = f (L, K), where L=Labour and K=Capital From the balance sheet of Apple Inc. 2010 2011 Total Revenues 65,225.00 108,249.00 Operating Income 46,840.00 74,459.00 Profit 14,013.00 25,922.00 As per the above table there is a growth rate of 84% in profit form 2010-2011. Since the company Apple needs to produce more and more iPads, it requires more raw materials and more labour so let us consider a hypothetical situation where the labour and raw materials required is also increasing by the same growth rate. The data for the Labour-employed cannot be found. So, the explanation of the production function is done by taking a hypothetical situation for labour, into account.
  13. 13. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 13 Labor L (in thousands) Output Q (in ten thousand) Marginal Product of Labor Value of Marginal Product of Labor Wage (W) Marginal Profit MPL= dQ/dL VMPL= P*MPL (P= 599 USD) per month dProfit= VMPL - W 0 0 50 800 16 9584 283 9301 100 1200 8 4792 283 4509 150 1400 4 2396 283 2113 200 1500 2 1198 283 915 The diagrammatic representation of the Production function for Apple would be as follows:- 0 20 40 60 80 100 120 140 160 180 0 2 4 6 8 Quantity of Output Quantity of Output IR D R NR 50 100 150 200 Q u a n t i t y o f O u t p u t Quantity of input 1600 1400 1200 1000 800 600 400 200
  14. 14. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 14 Here: I.R - Increasing Return D.R - Decreasing Return N.R - Negative Return As, it can be seen from the data for Capital employed, the Capital employed by Apple has been increasing over the years. So, we can conclude from this that the Labour employed would also be showing a similar increasing trend. Since, the capital employed is increasing, we can conclude that Apple is in the first phase of production function of increasing return where the increase in the number of inputs is leading to an increase in output of the company. Cost Function: The cost function is a function of input prices and output quantity. Its value is the cost of making that output given those input prices. Formulas used are as follows:  Total Cost = Fixed Costs (FC) + Variable Costs (VC)  Marginal Cost (MC) = dC/dQ; i.e. MC equals the slope of the total cost function and of the variable cost function  Average Total Cost (ATC) = Total Cost/Q  Average Fixed Cost (AFC) = FC/Q  Average Variable Cost = VC/Q.  ATC = AFC + AVC
  15. 15. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 15 As per the iPad sales: Time period Output Cost Average Cost 2nd Quarter, 2011 4.7million 16,649 million USD 3542.34 3rd Quarter, 2011 9.3million 16,890 million USD 1816.129 4th Quarter,2011 11.1 million 25,630 million USD 2309.009 1st Quarter, 2012 15.4 million 20,622 million USD 1697.373 2nd Quarter,2012 11.8 million 20,029 million USD 1339.091 Thus the Cost Schedule is: OUTPUT (in million) Average Cost 4.7 3542.34 9.3 1816.129 11.1 2309.009 11.8 1697.373 15.4 1339.091 0 500 1000 1500 2000 2500 3000 3500 4000 1 2 3 4 5 64 8 10 12 14 A V E R A G E C O S T S OUTPUT
  16. 16. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 16 As per the above graph the Average Cost should be a U shaped graph. In the case of iPad, initially it was a U shaped graph but then due to the factors of production and economies of scale the production cost went down. Since, the actual figures of fixed cost and variable cost is not available, we can interpret from the graph that the fixed and variable costs of the company declines over the period of time. Since, we have interpreted the fixed cost has declined, we can conclude that the fixed costs of the company doesn’t remain fixed. It changes over a period of time, so we can conclude that it will be an enveloped shaped graph. AC
  17. 17. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 17 Manufacturing Process: As assumed that the iPad is manufactured by the Apple in the US, it is not actually so in the reality. The iPad is designed by Apple in California but assembled by Foxconn in Shenzhen, China, which also does it for Apple's iPod, iPhone and Mac Mini. -The back of the iPad depicting where it is designed and where it is assembled - Assembling of iPads at Foxconn in Shenzhen, China
  18. 18. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 18 An estimation by iSuppli that each first generation iPad 16 GB (Wi-Fi version) costs US$259.60 to manufacture - a total that excludes research and development, licensing, royalty and patent costs. The various parts of the iPad and suppliers of the same include:  Apple A4, A5 and A5X: Samsung  NAND flash RAM chips: Toshiba and Samsung (64 GB model)  Touch-screen chips: Broadcom  IPS Display (1st & 2nd Gen): LG Display  IPS Display (3rd Gen) : Samsung  Touch panels: Wintek  Case: Catcher Technologies  Batteries: 60% of them are made in Taiwan by Simplo Technology and 40% by Dynapack International  Accelerometer: STMicroelectronics Price Breakdown of iPad For iPad 32GB GSM/HSPA Version:  Display/Touch Screen (thin film transistor liquid-crystal display) - $127.00  Memory - $65.70  Battery - $25.00  Processor - $14.00  Box Contents - $5.80  Camera - $4.30  Other Materials - $84.20  Manufacturing Cost - $10  Total - $336 The cost of display/touch screen of iPad 2 is 33 percent ($32) higher than the original iPad ($95). A lot of improvements were done to the iPad’s touch screen which includes a more expensive glue to improve the bonding. The Gorilla cover glass has also increased the costs.
  19. 19. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 19 Apple developed the A5 processor itself which is much faster to the previously used A4 processor. This was developed to meet the demand of market for faster processors for better speed and computing capability of the device. At $14 the A5 processor costs 75 percent more than the previous A4 chip. The suppliers of the components of iPad and the iPad 2 are same for the NAND flash, the multi-touch controllers and touch screen drivers, core chip in the wireless section, the apps processor and the Bluetooth, frequency, GPS and wireless local area network chips. The battery of iPad 2 is $4 more expensive than the iPad. Also, it is a lot thinner than the previous one to make iPad 2 as a whole thinner than the iPad. About labor: Apple found it difficult to find cheap and skilled labor as per their requirement. Apple estimated around 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPad. In US it would have taken them 9 months to find so many of the qualified engineers, but in China it took them just 15 days. Distribution Network: Distribution is one of the four elements of the marketing mix and is one of the most important tasks for a company. Distribution is the process of making a product or service available for use by a consumer, by using direct means, or using indirect means with intermediaries. Apple sells its products through a number of modes as described below:
  20. 20. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 20 Apple’s Distribution structure: B2B Customers:  For Educational purposes:  Through online Apple Store  Through direct sales force  Through third party wholesaler.  SMEs- Small and Medium enterprises:  Through online Apple Store  Through third party wholesaler. Not through the direct sales force since that is a small volume.  Enterprises:  Through online Apple Store  Through direct sales force. B2C Customers:  Through Apple iStores situated at various places.  Through resellers.  Through online Apple Store. Apple Stores:
  21. 21. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 21 Retailors:
  22. 22. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 22 Online Apple store:
  23. 23. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 23 Market Type and Product Type: Oligopoly is a type of market situation where in there are limited number of competing sellers who sell similar or different products. Sellers compete with each other by aggressive advertising and making their product nearly equal/competitive with its competitors and improved service delivery. An oligopoly sets barriers to entry and makes it difficult for new sellers to enter the market. Some of the characteristics of oligopoly market are:  A few firms selling similar products.  Each firm produces branded products.  Likely to be significant entry barriers into the market in the long run which allows firms to make supernormal profits.  Interdependence between competing firms. Businesses have to take into account likely reactions of rivals to any change in price and output. The tablet market is a type of oligopoly market as there are few major sellers like Apple and Samsung. These companies compete with each other to achieve higher market share. They sell differentiated products like iPad and Samsung Galaxy Tab. However, from consumer’s point of view both are really good products fulfilling the needs of the customers each having
  24. 24. Micro Economics Project Report iPad Shubham Singhal 80303120053 | 24 their own set of features and different OS. They are substitute products which is the main reason of competition between the two companies. Concentration ratio of tablets: As per the market share of the tablets, 80% of the market is held by top 2 companies that is the Apple and Samsung. This shows that market is highly concentrated. Thus, the CR4 Ratio here is 86%. Sources (from where the data has been taken for the analysis):    Apple’s Financial Reports   Apple’s WWDC Keynote event videos     