APPLE SLIPS AS SUPPLY WOES HIGH 1
In the article, Apple Slips as Supply Woes High on Holiday SalesForecast, Supantha Mukherjee reports that the firm is unable tomeet the huge demand for the iPhone 7 Plus. According to Mukherjee(2016), the low supply of the phone will possibly reduce overallsales and profit. Although the iPhone 7 Plus is more expensive thanthe 7 variant, it is in higher demand as it offers more advancedfeatures, for example, the dual-lens camera and larger screen. Thecompany had not projected consumers to place high orders for thephone. However, Mukherjee (2016) reports that some investors hadanticipated a stronger forecast especially with blowing up of SamsungNote 7, iPhone 7 Plus biggest rival. The recall of Note 7 has greatlyreduced competition thus, Apple will need to increase itsproduction. The company is currently unable to meet the demand andfailure to accelerate the manufacturing process will result in lowsupply. The review of the news article will help highlight theassociation between demand and supply.
Although the company’s shares slumped 2.5%, multiple brokeragesincluding Raymond James and J.P. Morgan have raised their valuetargets on the stock. Only Stifel has decreased the stock value, butanalysts maintain that the stock will be around US$105 and US$120 inthe next 2 or 3 quarters. Data from Reuters illustrates that themedian price target of the stock will be around US$131 meaning thatthe firm will experience increased growth. Mukherjee writes thatmultiple sources have indicated that iPhone 7 Plus demand willoutstrip supply hence, increased sales and profit margins. Thereports show that the firm will meet demand for the iPhone 7 variant,but chances of delivering enough iPhone 7 Plus are low. This meansthat Apple will be unable to ship between 500,000 and 1 millionsmartphones by the end of the year. The stock price is a significantaspect in assessing the growth of a firm, as it shows the willingnessof stockholders to invest (Obizhaeva & Wang, 2013). The projectedshare price increase points to increased sales and service delivery.
The article depicts the high demand for iPhone 7 Plus and the failureby Apple to supply enough phones. Price is the biggest determinant ofdemand, but for the iPhones, customer preferences and tastes andchange in income are the most important elements. The higher demandfor the iPhone 7 plus is due to the dual-lens camera and biggerscreen, features that are not present in the smaller model. Over theyears, the popularity of Apple has increased with android consumersshifting to iOS. Moreover, the high brand recognition that Appleenjoys means that consumers will rush to buy new iPhones. The effectsof advertising, high-end features, and suspension of Note 7 saleshave given Apple an edge thus, the huge demand. Changes in incomeare also pushing the demand for new iPhones across the world assmartphones are considered normal goods. An increase in income raisesthe purchasing power of consumers influencing the demand for a good.
Shift in the demand curve
Price of iPhones
The figure above demonstrates the shift of the demand curve from D0to D1. Demographic shifts, increased income, customerpreferences, low inclination for substitutes (close rivals), andcultural changes (disposition to smartphones with big and advancedfeatures) may have intensified the demand for the iPhone 7 Plus.
Effect of a Shift in supply to the demand curve
Price of iPhones
To meet demand, Apple will need to increase its manufacturingcapacity. Since the company has the requisite technology, capital,and labor, it will not be difficult to supply enough iPhones. Thecurve will shift from S0 to S1 but unlike in atheoretical case, it will not affect the price. Case,Fair, and Oster (2012) assert that an increase in bothsupply and demand results in a rise in the quantity price andquantity hence, in this scenario, the sales of iPhone will increasereducing future demand.
Presently, despite the low cost of production exacerbated byincreased innovation, the firm is unable to meet the demand, but inthe long-run, it will produce enough iPhones to reach the equilibriumpoint. The equilibrium price is the point of convergence between thedemand and the supply curves (Case et al., 2012). Hypothetically, itis where suppliers must meet the market demand, failure to which newsuppliers will enter. On the other hand, a higher supply than demandmeans that a firm’s sales will decrease.
The graph below shows the relationship between supply and demand ofthe iPhone. Area S signifies the current shortage of the phone, whichshows that the quantity required exceeds the quantity provided. AsMukherjee (2016) notes, Apple will increase its production to meetthe demand consequently, increasing sales. Although there is no dataas to the actual units required to meet demand or the items that havebeen sold, the firm will need to increase its supply. The equilibriumprice (Eq.) is the point where Apple will efficiently maximize itsprofit without overproducing or underproducing. In the long-run, bothcurves will shift to depict the changing trends since demand for theiPhone 7 Plus will decrease continuously causing the firm to lowersupply.
Demand and supply of iPhone 7 Plus
Price of iPhone
Mukherjee’s article shows that Apple has experienced an unexpecteddemand for iPhones with reduced competition from Samsung. Thediscontinuation of Note 7 and the associated consumer apathy forSamsung’s products means that Apple will encounter rising demand inthe unforeseeable future. However, the introduction of new productswill see a decrease in both the demand and supply. In regards toiPhone sales, the price is not a huge factor to existing Apple’scustomers and even with increased want, the company will not reduceits prices meaning it can only meet the demand by increasing itsproduction capacity.
Unlike Android phones where price plays a major function, users ofiPhones see iOS as dynamic and premium therefore, they are willingto buy a new phone despite its high value. Coupled with a great brandrecognition and customer loyalty, the firm is able to make hugeprofit margins. Moreover, the product differentiation of iPhonesmeans that the company can generate high sales, as it operates in amonopolistic competition where users of iOS will always buy an iPhonesince the operating system does not have a close substitute (it ishighly different from Android). According to Mukherjee (2016), theshare of Apple has slumped because of the firm’s failure to shipenough iPhones to meet the quantity required. This means thatconsumer perception for its new products is extremely significant tothe company. The article provides great insight as to the operationof a firm, as well as, the way demand and supply affect sales andprofit margins.
Case, K. E.,Fair, R. C., & Oster, S. M. (2012). Principlesof economics.Prentice Hall.
Mukherjee, S. (26 October 2016). Apple slips as supply woes high onholiday sales forecast. Reuters. Retrieved 31 October 2016fromhttp://www.reuters.com/article/us-apple-results-research-idUSKCN12Q1V5
Obizhaeva, A. A., & Wang, J. (2013). Optimal trading strategy andsupply/demand dynamics. Journal of Financial Markets, 16(1),1-32.