Research Papers

Microeconomics Research Paper

the science and practice of economic decision-making at the level of individual consumers and firms, offers a useful set of tools for understanding the world around us. A brief look at any good textbook of microeconomics can answer many questions, such as how products are marketed and priced, how companies compete with one another, and how these actions affect consumers. Hence, we can loosely separate microeconomics into two major areas, namely the microeconomics of the supply and the demand side, whereas each side has different issues to be addressed.

This research paper follows the separation between supply- and demand side analysis. It uses the example of Apple, Inc., a manufacturer of consumer electronics and software, to illustrate some of the fundamentals of the microeconomic analysis. The paper is divided into two parts: First, it examines the economic decision-making of Apple’s current and prospective customers, in order to understand the consumer market in which the company operates. Second, it looks at the company itself, trying to find sound microeconomic explanations to the company’s actions. Moreover, the latter section provides a critical analysis regarding Apple’s current and past operations and makes some suggestions for improvement.

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Demand Side Analysis
Demand side analysis deals with the ways in which individuals businesses decide what to purchase and consume. In the case of Apple, we can mention several basic microeconomic concepts that help to understand the consumer electronics market. The most fundamental issues to address here are how demand is changing as a result of price and changes of it.

The Demand Curve
The demand slope is considered to be negative. That is, the higher the price (p) of iPods, the lower is the quantity (q) demanded in the market for these products. For the sake of the discussion, let us assume that the current price of a brand new iPod is $100 (p0), and that at this price level Apple can sell as many as 500,000 units a year (q0). The orange arrows illustrate two responses of demand to changes in prices:

  1. Movement along the demand curve: If Apple will decide to decrease the price of iPods to $80 (p1), more people will find that at $80, iPod gives them relatively more utility than what it costs. As a result, more people will want to buy the product, and the total demand for iPod will be set at 750,000 units per year (q1).
  2. The shift of the demand curve: When the recession will be over, people will have higher income to be able to afford a luxurious item such as a new iPod. As a result, the total demand curve will shift to q1 at the current price level.

Price Elasticity of Demand
In microeconomics, the term “price elasticity” refers to the relative change of demand for change in price. In other words, since we know that diminishing demand with higher prices, the question is: “What is the % change in demand for the same in price?” For example, if the price of a MacBook will rise by 10%, from $1,000 to $1,100, Apple’s managers would like to know if the demand would decrease by 10% as well, or maybe by 5% or 15%. The same holds true, of course, for a decrease in price and its corresponding increase in demand.

Different products have different elasticity. Basic products such as bread are considered to be rather inelastic, since people are expected to eat relatively the same quantity of bread, regardless of its price. In sharp contrast, the market for Apple’s products has many substitutes (e.g. other manufacturers or second-hand market), whereas the company’s products are perceived as quite luxurious and the most expensive in their price category. Thus, the company’s products are very elastic for both ways; i.e. a 10% change of price is more likely to result in a 15% in demand than by 5%.

Supply Side Analysis
The simplest way to understand how Apple works is to think of it like a part of a system. That is, the company is like a huge economic machine, which takes resources from one side (input) and produces something valuable on the other (output). If we think about the company this way, we can immediately see that Apple is not only a seller of computers and other devices but also a buyer of resources such as raw materials, labor, and capital. Hence, Apple’s behavior when it comes to acquisition of inputs is like any other demand-side behavior.

Apple’s Supply Side Curve
Unlike the demand curve, which is a downward slope, the slope of the supply side if positive. That is, the higher the price, the more producers of consumer electronics would like to produce. It should help us to understand how much MacBooks, for example, should Apple produce for every price level.

Let us assume that the current price of a certain model of MacBook is $1,000. At $1,000 per unit (p0), Apple’s economists calculated that the most efficient quantity of this model is 10,000 units (q0). The orange arrows represent two examples for changes in quantity as a response to price:

  1. Movement along the supply curve: If a new competitor will enter the market and force Apple to reduce prices, the company will wish to sell fewer units than before (q1). The main reason for that is that p1 is less profitable, and thus Apple will try to allocate its resources to produce more profitable products.
  2. The shift of the supply curve: In case of a reduction of production costs (e.g. the introduction of a new technology), Apple is expected to make more profit out of every unit. Consequently, the company will have an incentive to produce more units (q2) at the current price level (p0).

The concept of efficiency is probably the most fundamental issue of sound economic management and based on the highest possible ratio between output and input. Simply put, being efficient means to make the optimal use of resources. Assuming that Apple’s demand-side performance is done well (i.e. achieving maximum utility at the lowest possible price), its managers’ challenge is to find WHAT to produce, HOW to produce it and to WHOM should it produce, so that Apple will be able to offer the most valuable bundle of produced goods with the lowest possible production costs.

In order to do so, Apple looks all over the world for ways to get the highest marginal utility from allocated resources. For example, while Apple’s American staff designs most of the components of the iPhone, many R&D tasks are outsourced for companies who specialize in specific issues, such as cellular technology. Moreover, most of the production processes are made in the Far East, where the labor market offers the lowest labor prices compared to the needed skills.

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Works Cited
McKenzie, Richard B, and Dwight R. Lee. Microeconomics for MBAs: The Economic Way of Thinking for Managers. Cambridge: Cambridge University Press, 2006.
Rutherford, Donald. Routledge Dictionary of Economics (Second edition). London: Routledge, 2002.

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