Micro Economics

Project Report

On

iPad

Submitted by:

Shubham Singhal

80303120053

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 2

iPad

About the product: The iPad is a tablet computer designed by Apple. It was made for the

purpose of making a new product that falls between the computers (laptops) and the mobile

smart phones. Its USP is its small size i.e. hand held portable device, light weight, thin,

attractive and multi utility product. Initially its purpose was for music, movies, internet, e-

books and games but now it has really grown into a complete product by itself. Apple has a

history of shocking and pleasing the world with its out of the box thinking, innovation and

thus great products. Iphone was a huge hit in the markets, following which Steve Jobs, ex-

CEO of Apple released the first iPad in April 2010. The iPad was then followed by iPad 2

and iPad 3 in the subsequent years due to the great market demand and response. The iPad

comes in various models depending on the storage capacity and the Wi-

Fi and cellular models i.e. with or without the 3G connectivity. It runs on the iOS – operating

system, the same OS on which the Iphone and the Ipod touch runs, of which iOS 5 is the

latest and the most advanced OS for the handheld devices. There are millions of applications

that run on this OS enabling the user for a large number of purposes like gaming, video

editing, clicking photos, social networking, news, online banking, online ticket booking and

payments, video chatting etc. Also, millions of developers develop these apps which are then

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 3

verified and put on the online store of Apple- App Store from where the users then download

and rate these on the App Store.

History of the product

In the year 1993, Apple launched its first tablet computer the Newton MessagePad 100. It

was followed by a number of Newton-based PDAs and the last one was the MessagePad

2100, which was discontinued in 1998. Apple then re-entered the market of mobile-

computing in 2007 with the launch of the revolutionary iPhone by the then CEO- Steve Jobs.

It is a mobile phone with screen size smaller than that of the iPad, and it had a camera too. It

had the new features like the multitouch finger-sensitive touchscreen interface running on

Apple's iOS mobile operating system.

Actually, the employees at Apple were working on the development of a tablet first but then

decided to launch the iPhone first, which is of smaller screen size because same concepts

would be applicable there as well. The internal code name of the iPad was K48. "Apple's

tablet" was a much talked about thing at the time of end of 2009. Names like

iTablet and iSlate were also given to it. To end the rumors and to launch the Apple’s actual

product, on January 27, 2010, Steve Jobs at an Apple’s press conference launched the iPad at

the Yerba Buena Center for the Arts in San Francisco. In Star Trek, PADD a fictional device

was used and the iPad looks similar to it, thus the name is given in admiration to the former.

- Steve Jobs showing the iPad at its launch

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 4

Significant Developments

At the recent WWDC 2012 event Apple showed iOS 6, the latest version of the Apple’s

mobile devices operating system. New features included are:

FaceTime over 3G

Call Rejection and Reminder

Siri now supports newer languages

Do Not Disturb mood

VIP Mail

Market Size

Apple sold 3,00,000 units of the first iPad on the first day itself in April 2010. During 2010,

Apple sold 14.8 million iPads worldwide. By the release of the iPad 2 in March 2011, more

than 15 million iPads had been sold, selling more than all other tablet PCs combined since the

iPad's release.

iPad’s Market Share

Apple's share of the tablet market was 68 per cent in 1st Quarter of 2012, much better than its

competitors like Samsung, Asus, and BlackBerry. Apple shipped 11.8 million iPads during

the quarter (1st Quarter of 2012), a down from 15.4 million units in the fourth quarter of

2011. Thus its worldwide share raised from 54.7 per cent in Q4 of 2011 to 68 per cent in Q1

of 2012.

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 5

Source: http://www.padgadget.com

The iPad runs on the Apple’s OS for mobile devices- iOS. It is the best OS thus making iOS very

popular. Market share on the basis of users using the various operating systems on the mobile devices

is as follows:

Source: http://glowstickbay.com

Competitors of iPad

As the competition is beefing up, the market for Tablets is dominated by 4 players - Apple

iPad, Samsung Galaxy Tab, Blackberry PlayBook and Google Nexus 7. Its top most

competitor being Samsung Galaxy Tab, Ipad still manages to have a high market share due to

the brand value of Apple and its distinguished features. Recently Apple has won a lawsuit

over Samsung and it has been found that Samsung products violated Apple patents and has

won 1 billion $ in damages.

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 6

Product lines

3 iPad’s have been released till date as per the ‘generations’ differentiated in brief as below:

Model iPad (original,

discontinued)

iPad 2 (2nd

generation)

iPad (3rd

generation)

Announcement

date January 27, 2010 March 2, 2011 March 7, 2012

Display

Multitouch display at a resolution of 1024 ×

768 pixels

Multitouch display at

a resolution of 2048

× 1536 pixels

Processor

1 GHz Apple

A4 system on a chip

1 GHz (dynamically

clocked) dual-

core Apple A5 system

on a chip

1 GHz (dynamically

clocked) dual-

core Apple

A5X system on a

chip

Memory

256 MB DDR RAM

built into Apple A4

package

512 MB DDR2 (1066

Mbit/s data rate) RAM

built into Apple A5

package

1024 MB DDR2

Storage 16, 32, or 64 GB

Environmental

sensors

Accelerometer, magne

tometer Accelerometer, magnetometer, gyroscope

Camera

Back N/A

720 p HD still

and video

camera

1080p HD still and video

camera

0.7 MP 5 MP

Front N/A VGA-quality still and videocamera, 0.3 MP

Source: www.Apple.com

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 7

Demand

In economics, demand is the desire to own anything, the mere to purchase a commodity is

demand, the ability to pay for it, and the willingness to pay during a specific period. Basically

Demand refers to how much (quantity) of a product or service is desired by buyers.

The iPad is a luxury product and is in high demand buy the consumers because of its high

build quality and the number of features it provides. Right since the day it was launched, it

has been in very high demand, since it is a very desirable product because it is very much

able to cater the demands of the customer as a complete product. Another main reason for it

to be in high demand is that its class apart from its competitors i.e. no other tablet is near to

what the Apple iPad has to offer to the users in terms of experience, technology and customer

satisfaction. People use it for:

Entertainment

Educational purposes

Doing their daily work like writing notes, making to do lists

Reading ebooks

Internet browsing

Gaming

Communicating with friends and family

Checking emails

Etc.

Over the years, the demand for the iPad has increased since the desirability of the product is

high.

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 8

Factors affecting demand of iPad

Many substitutes of the iPad with competitive specifications and prices are available

in the market.

Price comparisons of iPad and its substitutes:

iPad Rs. 30,500

HCL ME Tablet U1 Rs. 7999

Lava E-Tab Z7H (Grey) Rs. 5499

Samsung Galaxy Tab 730 (Pure

White)

Rs. 20999

Lenovo IdeaPad Tablet K1 (Red) Rs. 19249

ViewSonic ViewPad 7e Rs. 11550

Zync Z990 Plus Tablet Rs. 6990

These are the substitutes which affect the demand of the iPad.

Income of the buyers, represents the buying power of the buyers.

How much technologically packed iPad is, i.e. how strong the product is as per the

market standards like the configurations of its components (camera, connectivity,

processor etc.).

Difference in the different models of the various models of the iPads (iPad 1,

iPad2, iPad3).

Brand Image: the brand value of Apple is very high i.e. the Apple products are in

high demand, many people using different Apple product often tend to buy the other

products Apple has to offer like an iPhone user or a iMac user tend to buy and iPad as

well and the vice versa. This is because of the brand image of the company and the

quality products it offers.

Advertising campaign: Advertising of the iPad is really helpful in creating an

interest amongst the people and thus an increasing demand of the product. Apple has

floated a number of iPad advertisements on the internet and television. Infact, the

availability of the iPad in the stores of Apple and other vendors where people come

and see how it feels to actually hold and feel the device in their hand. This has

resulted in a high demand of the iPad.

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 9

Price elasticity of demand

The elasticity of demand measures how much the quantity demanded response to change in

price. The demand for a good is said to be elastic if the quantity demanded responds

substantially to changes in the price. The demand is said to be inelastic (as explained

below). The formula for computing elasticity of demand is given by:

(Q1 – Q2) / (Q1 + Q2)

(P1 – P2) / (P1 + P2)

In general, Apple iPad is a luxury good, whose elasticity (ed) is less than ( < 1 ) one. That is

change increase in price of iPad would merely affect the quantity demanded hence its

elasticity is less than one.

Supply

The law of supply states that (all other things unchanged) an increase in price results in an

increase in quantity supplied. This means that producers are willing to offer more products

for sale on the market at higher prices by increasing production as a way of increasing profits.

As in the case of iPad, there is a huge increase in the sales of the company Apple as it proves

there was a huge growth in demand. Since there is a huge growth in demand, which led to an

increase in the sales. So it can be derived that this increase in sales was supported by huge

increase in supply of the products of the company.

Quarterly Sales:

Quarter Sales

April 8, 2010 450,000

July 21, 2010

3.27 million

Sept. 2010 7.5 million

Jan. 18, 2011 14.8 million

March 2011 19 million

June 2011 25 million

October 2011 32 million

January 2012 50 million

April 2012 67 million

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 10

Graph:

As seen from the graph above, the sales of iPad have been going up each quarter inspite of its

price being constant, this is because of the increase in:

PDI- personal disposable income, i.e. people’s purchasing power has increased, and

since the ‘demand is backed by the willingness to pay’, the demand of the iPad has

increased. People have started spending more on luxury products.

Growth in service sector of people in the last few years. Thus more and more people

want the iPad and are even willing to pay for it.

Also, since the iPad through its constant developments and added features, many people from

various fields and departments wish and demand for the same. Like iPad is now very much

required by students, researchers, medical practitioners, businessman and musicians due to its

portability and on the go features.

0

10

20

30

40

50

60

70

80

April 8,2010

July 21,2010

Sept.2010

Jan. 18,2011

Mar-11 Jun-11 Oct-11 Jan-12 Apr-12

Sales

Sales

S

al

e

s i n

m

i

ll

i

on

s

32

25

19

14.8

7.5

3.27

.45

0

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 11

Complementary products of iPad:

The complementary products of iPad are:

Paid applications: The apps are one of the main things on the iPad. There are both free

and paid apps which can be downloaded and used from the App Store. The paid apps

need to be purchased form the app store and since these are used on the iPad and both

go together, it’s a complementary product to the iPad.

The iPad cover: it’s a revolutionary innovative product in itself since its one of its

kind. Its magnetic that clings on to the iPad and is easy to use. It protects the screen of

the iPad and is foldable thus provides a support while watching videos or surfing the

net while working on the iPad. It also comes in many attractive colours.

iPad accessories like the Apple iPad Dock, earphones and the headphones, wireless

speakers.

Points to be noted about the complementary products of iPad are

An increase in demand for iPad would cause an increase in demand for the paid

applications, the iPad smart cover and its accessories.

Cross elasticity demand (XED) value is always negative for complements.

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 12

Production function:

A production function is a function that specifies the output of a firm, an industry, or an

entire economy for all combinations of inputs.

This function is an assumed technological relationship, based on the current state of

engineering knowledge; it does not represent the result of economic choices, but rather is an

externally given entity that influences economic decision-making.

It can be represented as:-

P = f (L, K), where L=Labour and K=Capital

From the balance sheet of Apple Inc.

2010 2011

Total Revenues 65,225.00 108,249.00

Operating Income 46,840.00 74,459.00

Profit 14,013.00 25,922.00

As per the above table there is a growth rate of 84% in profit form 2010-2011.

Since the company Apple needs to produce more and more iPads, it requires more raw

materials and more labour so let us consider a hypothetical situation where the labour and

raw materials required is also increasing by the same growth rate.

The data for the Labour-employed cannot be found. So, the explanation of the production

function is done by taking a hypothetical situation for labour, into account.

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 13

Labor L

(in

thousands)

Output Q

(in ten

thousand)

Marginal

Product of

Labor

Value of

Marginal

Product of

Labor

Wage

(W)

Marginal

Profit

MPL= dQ/dL

VMPL= P*MPL

(P= 599 USD)

per

month

dProfit=

VMPL -

W

0 0

50 800 16 9584 283 9301

100 1200 8 4792 283 4509

150 1400 4 2396 283 2113

200 1500 2 1198 283 915

The diagrammatic representation of the Production function for Apple would be as follows:-

0

20

40

60

80

100

120

140

160

180

0 2 4 6 8

Quantity of Output

Quantity of Output

IR DR

NR

50 100 150 200

Q

u

a

n

t

i

t

y

o

f

O

u

t

p

u

t

Quantity of input

1600 1400 1200 1000 800 600 400 200

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 14

Here:

I.R - Increasing Return

D.R - Decreasing Return

N.R - Negative Return

As, it can be seen from the data for Capital employed, the Capital employed by Apple has

been increasing over the years.

So, we can conclude from this that the Labour employed would also be showing a similar

increasing trend.

Since, the capital employed is increasing, we can conclude that Apple is in the first phase of

production function of increasing return where the increase in the number of inputs is leading

to an increase in output of the company.

Cost Function:

The cost function is a function of input prices and output quantity. Its value is the cost of

making that output given those input prices.

Formulas used are as follows:

Total Cost = Fixed Costs (FC) + Variable Costs (VC)

Marginal Cost (MC) = dC/dQ; i.e. MC equals the slope of the total cost function and

of the variable cost function

Average Total Cost (ATC) = Total Cost/Q

Average Fixed Cost (AFC) = FC/Q

Average Variable Cost = VC/Q.

ATC = AFC + AVC

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 15

As per the iPad sales:

Time period Output Cost Average Cost

2nd

Quarter, 2011 4.7million 16,649 million USD 3542.34

3rd

Quarter, 2011 9.3million 16,890 million USD 1816.129

4th

Quarter,2011 11.1 million 25,630 million USD 2309.009

1st Quarter, 2012 15.4 million 20,622 million USD 1697.373

2nd

Quarter,2012 11.8 million 20,029 million USD 1339.091

Thus the Cost Schedule is:

OUTPUT (in million) Average Cost

4.7 3542.34

9.3 1816.129

11.1 2309.009

11.8 1697.373

15.4 1339.091

0

500

1000

1500

2000

2500

3000

3500

4000

1 2 3 4 5 6 4 8 10 12 14

A

V

E

R

A

G

E

C

O

S

T

S

OUTPUT

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 16

As per the above graph the Average Cost should be a U shaped graph. In the case of iPad,

initially it was a U shaped graph but then due to the factors of production and economies of

scale the production cost went down. Since, the actual figures of fixed cost and variable cost

is not available, we can interpret from the graph that the fixed and variable costs of the

company declines over the period of time.

Since, we have interpreted the fixed cost has declined, we can conclude that the fixed costs

of the company doesn’t remain fixed. It changes over a period of time, so we can conclude

that it will be an enveloped shaped graph.

AC

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 17

Manufacturing Process:

As assumed that the iPad is manufactured by the Apple in the US, it is not actually so in the

reality. The iPad is designed by Apple in California but assembled by Foxconn in Shenzhen,

China, which also does it for Apple's iPod, iPhone and Mac Mini.

-The back of the iPad depicting where it is designed and where it is assembled

- Assembling of iPads at Foxconn in Shenzhen, China

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 18

An estimation by iSuppli that each first generation iPad 16 GB (Wi-Fi version) costs

US$259.60 to manufacture - a total that excludes research and development, licensing,

royalty and patent costs. The various parts of the iPad and suppliers of the same include:

Apple A4, A5 and A5X: Samsung

NAND flash RAM chips: Toshiba and Samsung (64 GB model)

Touch-screen chips: Broadcom

IPS Display (1st & 2nd Gen): LG Display

IPS Display (3rd Gen) : Samsung

Touch panels: Wintek

Case: Catcher Technologies

Batteries: 60% of them are made in Taiwan by Simplo Technology and 40% by

Dynapack International

Accelerometer: STMicroelectronics

Price Breakdown of iPad

For iPad 32GB GSM/HSPA Version:

Display/Touch Screen (thin film transistor liquid-crystal display) - $127.00

Memory - $65.70

Battery - $25.00

Processor - $14.00

Box Contents - $5.80

Camera - $4.30

Other Materials - $84.20

Manufacturing Cost - $10

Total - $336

The cost of display/touch screen of iPad 2 is 33 percent ($32) higher than the original iPad

($95). A lot of improvements were done to the iPad’s touch screen which includes a more

expensive glue to improve the bonding. The Gorilla cover glass has also increased the costs.

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 19

Apple developed the A5 processor itself which is much faster to the previously used A4

processor. This was developed to meet the demand of market for faster processors for better

speed and computing capability of the device. At $14 the A5 processor costs 75 percent more

than the previous A4 chip.

The suppliers of the components of iPad and the iPad 2 are same for the NAND flash, the

multi-touch controllers and touch screen drivers, core chip in the wireless section, the apps

processor and the Bluetooth, frequency, GPS and wireless local area network chips.

The battery of iPad 2 is $4 more expensive than the iPad. Also, it is a lot thinner than the

previous one to make iPad 2 as a whole thinner than the iPad.

About labor: Apple found it difficult to find cheap and skilled labor as per their requirement.

Apple estimated around 8,700 industrial engineers were needed to oversee and guide the

200,000 assembly-line workers eventually involved in manufacturing iPad. In US it would

have taken them 9 months to find so many of the qualified engineers, but in China it took

them just 15 days.

Distribution Network:

Distribution is one of the four elements of the marketing mix and is one of the most important

tasks for a company. Distribution is the process of making a product or service available for

use by a consumer, by using direct means, or using indirect means with intermediaries.

Apple sells its products through a number of modes as described below:

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 20

Apple’s Distribution structure:

B2B Customers:

For Educational purposes:

Through online Apple Store

Through direct sales force

Through third party wholesaler.

SMEs- Small and Medium enterprises:

Through online Apple Store

Through third party wholesaler.

Not through the direct sales force since that is a small volume.

Enterprises:

Through online Apple Store

Through direct sales force.

B2C Customers:

Through Apple iStores situated at various places.

Through resellers.

Through online Apple Store.

Apple Stores:

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 21

Retailors:

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 22

Online Apple store:

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 23

Market Type and Product Type:

Oligopoly is a type of market situation where in there are limited number of competing

sellers who sell similar or different products. Sellers compete with each other by aggressive

advertising and making their product nearly equal/competitive with its competitors and

improved service delivery. An oligopoly sets barriers to entry and makes it difficult for new

sellers to enter the market.

Some of the characteristics of oligopoly market are:

A few firms selling similar products.

Each firm produces branded products.

Likely to be significant entry barriers into the market in the long run which allows

firms to make supernormal profits.

Interdependence between competing firms. Businesses have to take into account

likely reactions of rivals to any change in price and output.

The tablet market is a type of oligopoly market as there are few major sellers like Apple and

Samsung. These companies compete with each other to achieve higher market share. They

sell differentiated products like iPad and Samsung Galaxy Tab. However, from consumer’s

point of view both are really good products fulfilling the needs of the customers each having

Micro Economics Project Report iPad

Shubham Singhal 80303120053 | 24

their own set of features and different OS. They are substitute products which is the main

reason of competition between the two companies.

Concentration ratio of tablets:

As per the market share of the tablets, 80% of the market is held by top 2 companies that is

the Apple and Samsung. This shows that market is highly concentrated.

Thus, the CR4 Ratio here is 86%.

Sources (from where the data has been taken for the analysis):

www.Apple.com

www.google.com

Apple’s Financial Reports

www.engadget.com

Apple’s WWDC Keynote event videos

www.bestbuy.com

www.flipkart.com

www.padgadget.com

www.glowstickbay.com

www.isuppli.com