Apple (AAPL) puts price elasticity to the test

By: ispeculatornew
Date posted: 07.09.2010 (4:00 am) | Write a Comment  (4 Comments)

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If you’ve had any basics economics course, you know one thing. There is an inverse relationship between price and demand. It is called Price Elasticity of demand. You can take a look at the chart just next to this and if you were listening at all during those classes, it will bring back some vague memories. Of course, the real life application of it is easy to understand. Any kid will notice the relationship between the two. That is why you have sales after all isn’t it? Take down the price a bit and you will be able to either grow your market share or diminish your inventory.

Two types of goods

Generally, the criterias that make a good elastic or not are:

Availability of goods: The easier it is to find a substitute, the more consumers will switch their choice if prices go up
Percentage of income: Purchases of electronics & cars will be affected much more by price increases than price changes of food or toilet paper for example
Necessity: Obviously, consumers will reduce demand on non-necessary items such as flat panel tv’s than on medicines or food
Duration: When consumers have the possibility of delaying their purchases, they will be able to put off a purchase while buying something like gasoline will be done no matter what the price is (basically).

That relationship is real but not as true depending on the specific product:

Elastic Demand Goods: These are luxury good or items that can be easily replaced, they are goods that can be switched for another. For such products, consumers will easily put off or buy another product if the price increases even a little bit.

Inelastic demand goods: For necessary goods such as gas, medicine and food, consumers will pay up even if the price increases.

Back to Apple

So let’s get this straight, Apple mainly sells these types of products

Ipod: digital music player

Iphone: smartphone

Ipad: Tablet pc

MacBook: Desktop and laptop computers

Would everyone agree that all of these products are:

-Sold by many other retailers
-Often sold cheaper by competitors
-Luxury Items
-Non-necessary items
-Purchases that could be put off

All of that being said, did anyone honestly even look at the prices of recently launched Ipad and Iphone4 models? Are they more expensive or cheaper than the competition? Just try asking anyone you know who purchased one… I’d say chances are very good that they did not even look at alternatives!!! All because of one thing… It is an Apple product, a brand trusted like no other right now.

So shareholders and prospective shareholders, how much do you think owning that brand is worth?….

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