Question

1. “To ring in the 10th anniversary of the iPhone, Apple on Tuesday is delivering a handful of new smartphones that won’t just challenge your daily tech habits—no more home button!—but lighten your bank account, too. The new iPhone is expected to come with a $1,000 price tag, making it the most expensive Apple phone to date. That’s a decent leap from the iPhone 7 Plus, currently Apple’s most expensive phone ever at $769. The new device, in contrast, will approach the cost of a computer. But Apple has good reason to believe this jump won’t hurt it.”

Conclude what Apple must have believed about the price elasticity of demand for iPhones in 2017 and why that implies a higher price could be a good business decision. Briefly explain your answer.

Answer 1

It has been stated that Apple is launching a new iPhone at much higher price than its earlier devices.

Even at this high price, Apple is confident of selling significant number of devices and earning greater revenue relative to previous launches.

As we know that, as per the Law of demand, as the price of a product increases, its quantity demanded decreases and vice versa.

However, the magnitude of change in quantity demanded due to change in price depends on the price elasticity of demand for the product.

If demand is inelastic then proportionate change in quantity demanded is less than the proportionate change in price and due to this increase in price leads to increase in total revenue and vice versa.

On the other hand, if demand is elastic then proportionate change in quantity demanded is more than the proportionate change in price and due to this increase in price leads to decrease in total revenue and vice versa.

The Apple is anticipating an increase in sales and revenue with launch of new device even though device is being launched at much higher price.

This is because that Apple believed that the demand for iPhones in 2017 is inelastic.

As stated above, in case of inelastic demand, an increase in price leads to increase in total revenue.

Thus,

With inelastic demand, higher price of iPhone will translate into higher total revenue for Apple and, therefore, a higher price is a good business decision for the Apple.