Tag: iPhones

Supports: Microeconomics and Economics, Chapter 6, and Essentials of Economics, Chapter 7.

Photo from from Reuters via the Wall Street Journal.

An article on bloomberg.com noted that in China after Apple cut by 10 percent the price of its iPhone 15 Pro Max—the most expensive iPhone model—sales of this model increased by 12 percent.

a. Based on this information, is the demand in China for this model iPhone price elastic or price inelastic? Briefly explain.

b. Do you have enough information to be confident in your answer to part a.? Briefly explain.

c. Assuming that the price elasticity you calculated in part a. is accurate, should managers at Apple be confident that if they cut the price of this iPhone model by an additional 10 percent they would sell 12 percent more? Briefly explain.

Solving the Problem

Step 1: Review the chapter material. This problem is about the price elasticity of demand, so you may want to review Microeconomics (and Economics), Chapter 6, Sections 6.1, 6.2 and 6.3 (Essentials of Economics, Chapter 7, Sections 7.5, 7.6, and 7.7)

Step 2: Answer part a. by using the information provided to determine whether the demand for this iPhone model in China is price elastic or price inelastic. In Section 6.1, we define the price elasticity of demand as being equal to (Percentage change in quantity demanded)/(Percentage change in price). From the information given, the price elasticity of demand for this iPhone model in China equals 12%/–10% = –1.2. Because this value is greater than 1 in absolute value, we can conclude that demand for this iPhone model in China is price elastic.

Step 3: Answer part b. by discussing whether you have enough information to be confident in your answer to part a. If we have values for the change in price and the change in the quantity demanded, we can calculate the price elasticity of demand provided that nothing that would affect the willingness of consumers to buy the good—other than the price of the good—has changed. In this case, if other factors that are relevant to consumers in making their decision about buying that iPhone model have changed, then the demand curve will have shifted and the 12 percent increase in iPhones sold will be a mixture of the effect of the price having decreased and the effects of other factors having changed. For example, if the prices of smartphones sold by Vivo and Huawei—two Chinese firms whose smartphones compete with the iPhone—had increased, then the demand curve for the iPhone 15 Pro Max will have shifted to the right and our calculation in part a. will not give us an accurate value for the price elasticity of demand for the iPhone 15 Pro Max.

Step 4: Answer part c. by explaining whether, assuming that the price elasiticity you calculated in part a. is accurate, Apple’s managers can be confident that if they if they cut the price of this iPhone model by an additional 10 percent they would sell 12 percent more of this model. The first price cut for this iPhone model caused a movement down the demand curve. For Apple’s managers to be confident that that the same percentage price cut would result in the same percentage increase in the quantity sold, the price elasticity would have to be constant along the demand curve for this model. As we show explicitly for a linear demand curve in Section 6.3, the price elasticity of demand is unlikely to be constant along the demand curve (although in an unusual case it would be). In general, we expect that in moving further down the demand curve the price elasticity of demand will decline in absolute value. If that result holds in this case, then an additional 10 percent cut in price is likely to result in less than a 12 percent increase in the quantity demanded.