Apple sold 7.5 million iPads last year, in 9 months. That's 833,000 a month. Or 27,000 a day. Or 1,157 an hour. Or 19 a minute A Headline out of many more news about ipad was one you read above. The new generation of gadgets that had unbelievable success in US and World markets heat the odds somehow that none of economists could imagine even the owners of Apple. The gadget is billed as a breakthrough. Born in the deepest recession since the Great Depression, it becomes a must-have. Americans snap up so many of them that suppliers run short and a high-tech boom is born. That was the IBM PC in 1983. The boxy personal computer became an office staple, a household buzzword, and an icon of how a battered economy reinvents itself and moves powerfully forward. Will Apple's iPad do the same for today's economy?
The snazzy tablet computer is already getting accolades and, so far, flying off the shelves. Usually, high-tech sales and the larger economy are loosely related. People buy fewer gadgets when times are tough, but breakthrough products transcend their economic times and keep on selling. On rare occasions, a boom in the product signals great times for the economy. For that to happen with the iPad, both it and the economy will have to outperform expectations by significant margins. "For many consumers, the iPad is a ray of sunshine on a dark day," says Sarah Rotman Epps, an analyst for Forrester Research in Cambridge, Mass. But "the iPad is a specialized device. It's not a phone. It's not a laptop. There's a learning curve for consumers to understand why they'll need to have it." So hereby, the impact of iPad on economics will be discussed. Micro economy and Macro economy are basic features of economic to be discussed in this paper. The importance of this research is based on the high demand for this new product which has shaken the market surprisingly.
1. Micro Economical Horizon For i-Pad:
Apple's new tablet computer is certainly off to a strong start: 300,000 iPads sold on its first day (April 3), 500,000 in its first week. One of them helped Norwegian Prime Minister Jens Stoltenberg stay in contact with his government on April 19 as volcanic ash from Iceland kept him from flying back home from the United States. Apple itself is booming, announcing record profits and revenues for the last quarter of 2009 and following it up with strong results in the first quarter of this year, mostly on sales of its popular Mac personal computers (up 33 percent from last year's secondquarter results) and -iPhones (up 131 percent). If analysts are right, the iPad should sell somewhere around 5 million units this year, a forecast that is robust but certainly not chart-topping. An InfoWorld survey found that about 6 percent of consumers planned to buy one within a year, a rate that would suggest sales of 7 million¹.
Units Sold (million)
6 4 2 0 1st month 3rd 4th 5th 6th 7th 8th 9th 10th11th12th 2nd Units Sold (million)
1.1. Primary Impact:
Supply-Demand curve: According to what was said earlier, despite its short comings, demand for the Apple¶s product shattered expectations. The stronger-than-expected demand for the iPad in the United States took Apple by surprise. The several hundred thousand they released were not enough to cope with the demand for the United States alone. The shortage in the United States equated to a push back in the release date for iPads in the other markets around the world.
The diagram below depicts the situation Apple is facing.
Excess Demand for Apple's iPad Apple has its price for the iPad set at P1. This shifts the demand from Q1 to Q3. As it¶s obvious Q3 is down very far along the demand curve whilst the point on the supply curve is down to the left indicating that there are not enough units of the iPad to satisfy the demand of the consumers. In order for apple to fix this, they need to move their equilibrium point to E1. There, the quantity supplied will meet the quantity demanded.²
1.2. Secondary Impact:
Apple¶s major hurdle to selling the iPad is probably price. The main reason consumers have rejected the Amazon (AMZM) Kindle has been its high price, according to several surveys. IDC found among potential iPad buyers ³the prospect of spending $500 or more for a new device that doesn¶t yet have a clear advantage over their other primary devices is unappetizing.´ Apple may have to quickly cut prices the way that it did with the iPhone to keep consumer interest in the iPad high. That will hurt Apple¶s margins unless it can pass the costs of the price cuts on to its suppliers.
Facing the extraordinary demand for iPad the demand curve will shift to right but whether it will increase the price or not is based on company¶s policy. If Apple does have to lower the price of the iPad quickly, it may lose some of its reputation as a premium product. That could lead to consumers viewing it as no better than table PC offerings from HP (HPQ) and Dell (DELL). One of the ironies about Apple products is that high prices seem to make them more attractive than their competition. This may be why the Mac has a larger share of the market for computers with prices above $1,000 that it does for the balance of the industry. Features will be the critical reason to the success of the iPad, but price may be just important. The question is whether it is critical for the new tablet PC to be cheap or expensive.
Lectures on iPad suggest the new equilibrium shift to Q1 in order to maintain customer satisfaction and demand even though it may hurt the company at first yet company will be keep long-term market under control.
1.3. Marginal Cost:
According to an article appearing on Bloomberg.com, the marginal cost of manufacturing the 16-gigabyte Apple iPad is around $260. This includes $95 for the touch-screen display and $26.80 for the device¶s processor. Flash memory accounts ³« for $29.50 in costs on the 16-gigabyte model, $59 in the 32-gigabyte version and $118 in the 64-gigabyte model. The differences in flash memory costs ³«push the cost of manufacturing the 32-gigabyte version of the iPad, which sells for $599, to $289.10. They boost the cost of the 64-gigabyte version, which sells for $699, to $348.10.´
1.4. Profit Margin:
Obviously, Apple has very healthy profit margins on these devices; roughly 48% for the 16-gigabyte iPad, 52% for the 32-gigabyte iPad, and 50% for the 64-gigabyte iPad. From this information, we can also infer the price elasticity of demand for these products. Price elasticity is a measure of the percentage change in quantity demanded associated with a one percent change in price.
1.5. Price Elasticity of Demand:
From basic price theory, we know that marginal revenue MR = P(1 + 1/L , where P is price and L corresponds to the price elasticity of demand. We also know that the optimal output decision for a profit maximizing firm involves setting quantity such that marginal revenue is equal to marginal cost; i.e. ,MR = MC. Thurs, we can rewrite the marginal revenue equation in the following manner: MC = P(1+1/L ²> MC = P + P(1/L therefore, (MC±P)/P= (1/L ²> L=P/(MC-P).
Applying this equation to the various iPad models that are currently for sale, we find that: The price elasticity of demand for the 16-gigabyte iPad is L= P/(MC ± P) = 499/(260-499) = -2.09; the price elasticity of demand for the 32-gigabyte iPad is L= P/(MC ± P) = 599/(289-599) = -1.93; and the price elasticity of demand for the 64-gigabyte iPad is L= P/(MC ± P) = 699/(348-699) = -1.99; Any number less than -1 for L indicates that demand is relatively elastic. This implies that if Apple were to change prices from current levels, then the percentage change in quantity demanded would exceed the percentage change in price. In other words, if Apple dropped prices, revenue would increase because of a larger quantity response, and if Apple raised prices from current levels, then revenue would decrease due to a disproportionate decline in quantity demanded. Pareto's Principle Pareto is the Italian 18th Century economist credited with the first research on the 80/20 rule which suggests that in Apple's case, 80 percent of their revenue will come from 20 percent of their customers. Apple has built the fun parts of the iPad to focus on the best of their existing iTunes store customers. I have only just started buying applications for my iPod Touch but one of my colleagues started buying apps on the first day they got their iPhone. Apple wants the iPad in the hands of those customers that are already in the habit of using iTunes, the App Store and now the IBookstore. All in all from a behavioral economics perspective today was really just a series of shrewd moves by Apple to maximize revenue while minimizing risks. But it¶s necessary to look behind the veil of the R&D hype to see them for the careful and measured steps that they really are.
Long-Term Predictions: More important is how the gadget performs over three years. Forrester expects the iPad to outperform the iPod, which sold 10 million units in its first three years. But it won't reach the iPhone's 42 million sales in its first three-year stint. That's a forecast not unlike the consensus outlook for the economy as a whole: better than the shallow recovery of the last recession, but not as strong as the comeback from the 1981-82 recessions.
1.6. Impact on Market¶s Economy:
Can machine or economy outperform expectations? "A breakthrough product can do well, even in difficult economic environments," says Shawn DuBravac, chief economist and director of research at the Consumer Electronics Association in Arlington, Va. "When Apple launched the iPod, we were going through a similar economic period."
Likewise, the economy can thrive without robust sales of consumer technology. They're just not big enough to nudge the economy's needle. For example, worldwide spending on computer hardware this year will amount to only about 10 percent of the $3.4 trillion
spent on information technology, according to Gartner Inc., an information technology research and advisory company based in Stamford, Conn. On rare occasions, however, the economy and a high-tech product may travel on parallel growth tracks. That's how the PC became the icon for the recovery from the 1981-82 recession, which at the time was the longest and deepest economic downturn since the Great Depression. In early 1983, when Time magazine famously named the personal computer as "Machine of the Year," the Apple II was still the face of personal computing, with about one-quarter of the worldwide market. But the more powerful PC was catching up fast. By midyear, sales were so strong that IBM couldn't make the machines fast enough. Some dealers had to wait for weeks to get shipments. The boom caught IBM and everyone else by surprise. The following year, IBM was on top with one-third of the market. Likewise, after four straight quarters of decline, from 1981 to 1982, US economic growth accelerated during the next three quarters. In hard times, individuals lose jobs and strike out as entrepreneurs. Companies seek to bolster revenues by creating new products. If the iPad fizzles, maybe the iPhone or some other company's smart phone will come to the economy's rescue. Perhaps it will be an electric car or some other energy-saving device. Few people count out Apple, however, on delivering breakthroughs. "Apple is very good at selling things that people want to buy," says Ms. Rotman Epps of Forrester.
IPad Impact On other companies
1.7. Impact On Other Companies:
Further than monopolistic marketing Impact on PC market Few companies can disrupt an entire industry with a single product launch. But Apple, whose history is filled with such game-changing moments, has done it again with its iPad tablet. Apple¶s iPad has rattled the technology world by causing many consumers to think twice about buying new personal computers. That hesitation was one reason worldwide shipments of new PCs stumbled in the third quarter, growing more slowly than research firms IDC and Gartner had anticipated. The other big factor was consumers¶ dreary outlook on the economy, especially in the US and Europe, which has led them to pinch pennies more, pay off debts and spend less on PCs and some other kinds of electronics. The hype about tablets has computer makers and their suppliers worried about how much ground traditional PCs might lose in coming months and years. Apple sold 3.3 million iPads in the device¶s first three months on the market, and some analyzers estimate Apple sold more than 5 million during the following quarter, which ended in September. Until now, it wasn¶t clear whether Apple was poaching would-be PC buyers with the iPad, or merely giving Apple fans another expensive gadget to add to their computer collections. Far fewer tablets are sold than PCs, of course, and Intel , the biggest maker of PC microprocessors and a new entrant in the tablet market, said on Tuesday in reporting its quarterly numbers that it¶s too early to tell how much of the PC business is being cannibalized by tablets. But IDC and Gartner said the smaller, keyboardless devices are at the very least pushing many consumers to pause their decisions on buying new computers. Gartner said PC makers shipped more than 88.3 million machines in the third quarter, an increase of 7.6% over last year. Gartner was expecting a 12.7% rise. IDC put the third-quarter number at 89.3 million, a 10.5% increase, which was 3 percentage points below what it expected. Both companies blamed economic anxieties for depressing sales, and each had its own take on the
iPad¶s effect. Hype around devices such as the iPad has also affected consumer notebook growth by delaying some PC purchases, especially in the US consumer market. Media tablets don¶t replace primary PCs, but they affect PC purchases in many ways based on surveys.
Hype around media tablets has led consumers to take a wait-and-see approach to computer purchases. Bob O¶Donnell, an IDC vice-president, said the iPad is hurting sales of netbooks ² small, inexpensive laptops.
2. Macro Economical Point of View: 2.1. I-pad Impact on USA GDP : 2.1.1.Aggregate Demand & Aggregate Supply:
The category of aggregate demand which mostly will be affected by iPad is Technology. The brand new technology which is presented by iPad will cause an increase in investment spending. The companies should have some investment to deal with situation and innovate or at least revise the operating system. Thus, the shift of AD
curve will be to right to show this increase. The same reason will end with a shift to the right for aggregate supply too.
GDP = C + I + G + ( X ± M )
2.1.2. Consumption Expenditure ( C ):
The fact that i-Pad has increased the total C of households in USA is inevitable. 7.5 million units sold of i-Pad in the first year is a witness of this claim. However, the decrease in PC and Laptops sold should be under supervision yet, the earlier calculations showed that the total assumption of consumption expenditure is higher than the deficit. Provided that, the units exported added to these number will support this idea.
2.1.3.Gross Private Domestic Investment ( I ):
Any new technology will be started by investment and a company like Apple is in the same boat. In other words, the business will increase the Gross domestic investment. A total of 1.7 billion $ investment is coming from Apple which a great part of it is for iPad development in 2009 and so on.
2.1.4.Government Purchase ( G ) :
Government will not play a decisive role in iPad purchase however it may be a buyer but its not significantly unique consumer so, the Government purchase will be roughly indifferent or smooth.
2.1.5.Net Export ( Xn ) :
The forecasts for exported units of iPad for each year are almost 7 million. Regardless of whether the forecast will occur or not, it will increase the Net export although some parts (processor) of iPad is being imported from Japan but it is almost 10% of total cost of each unit so based on experts guess that the marginal benefit for each unit sold is more than 50% so the total Net export of US is going to be increased.
Overall the GDP of USA will owe a great GDP increase to iPad.
The iPad production procedure will have not a very significant impact on increasing the inflation yet it may be helpful to control it in US.
Apple has a large number of retail shops in US and all over the world which¶s count is 317 so far with almost 26¶500 persons working staff so ignoring the number of employees in the company it will be a great number that are working for apple directly. In fact apple has a positive impact on US employment following other significant positive impacts of it.
1. 2. Douglas A. McIntyre, Demand For Apple iPad May Be Higher Than Expected, http://247wallst.com Dominic Fajardo, Canadian academy, http://dominic92.wordpress.com/2010/04/24/surge-in-ipaddemand-results-in-delays-for-overseas-release/
3. Laurent Belsie, Staff writer, Can machine or economy outperform expectations? 4. iPad impact: Tablets contribute to PC market pain, http://economictimes.indiatimes.com 5. iPad-economics-or-how-to-sound-smart-this-weekend, http://blogs.wsj.com/economics/2010/04/03 6. David Wesley, The Economics of Developing Apps for the iPad and iPhone, http://performancetrap.org/ 7.
PeterThompson, The-economics-behind-the-new-ipad, http://peterthomson.posterous.com