iPhone 5 Sells Five Million Over the Opening Weekend

CMS WiRE online has posted an article written by Chris Knight on September 24, 2012 regarding “iPhone 5 Sells Five Million Over the Opening Weekend” on http://www.cmswire.com/cms/customer-experience/iphone-5-sells-five-million-over-the-opening-weekend-017490.php. This article is about the release of the latest model of the iPhone that has been sold over five million units across the 22 territories after a few days it has been release out to the market. Besides that, the company also announced the new release of the iPad Mini in the coming october. There has also been a release in the new operation system- iOS6 which has receive a few complaints from the users due to some application causing some flaws but overall, the new operating system is getting a positive reception.

Apple Inc, the producer of the iPhone and many other products has done it  again by releasing their latest model of the iPhone, the iPhone 5. Anticipated by many, there has been hype and queues outside the Apple stores and other retailers as millions around the world flocked to get their hands on the latest iPhone. Based on my opinion, if Apple. Inc was to increase the price of their phone then the customers would face a shortage of demand for the phone. Demand is affected by two effects, the substitution effect and the income effect. As the 'The Law of Demand' states that the higher the price of a good, the smaller is the quantity demanded. The substitution effect says that when the relative price of a good, which is their opportunity cost rises, consumers will seek other substitute for it and this will lead to a decrease in the quantity demanded of the product. For example, customers may substitude Apple products with Samsung products. The income effect is affected when consumers cannot afford to buy the goods they previously are buying anymore due to the rise in price of that good and bringing down the quantity demanded of the good. Other than that, the supply would also be affected and the factors that would influence a change in supply would be the price factor of production and technology. The price factor of production is the price used to produce a good, if the production cost increase, the minimum price that the supplier are willing to accept for each unit produced would be increased. Technology factor is advancement in technology that would lead to creation of new products which would result in lesser cost needed to produce the existing goods. All of these factors would affect Apple Inc drastically if there were a change in price of their products.

Although the new model of the iPhone has made a big sales and bring a lot profits to the company but it has a high elasticity of demand. Price elasticity is said to be the responsiveness of the quantity demanded of a certain good when there is only a change in price. As the new model of the iPhone is a phone, it has a high elasticity of demand because there are many other substitutes in the market that offer similar function to the iPhone such as Samsung GALAXY SIII or the Nokia Lumia that are both the smart phones that has been recently release to the market with similar functions as the iPhone. Thus, if Apple. Inc were to increase the price of the iPhone, consumers may choose other company’s products as they offer almost the similar functions as the iPhone.  Besides that, the other factor that may affect the price elasticity of demand is the proportion of the income spent on a good. This means that if economy crisis were to hit in the future and worker’s salary were to be cut, the proportion of their income spent on such goods like smart phones would be greatly reduced. In my opinion, smart phones such as iPhone 5 is considered as luxury goods therefore if salary were to be cut, then they would seek other options to comprehend their salaries. On the other hand, the cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in price of the substitute good or a complement good. This means that if the price of the products from the competitor of Apple Inc increase, then there would be a change in demand for the products of Apple Inc because the cross elasticity of demand for a substitute is positive.

An opportunity cost of production for a company or a firm is the sum of cost of using all the  resources to make the product. Based on my opinion, the opportunity cost of Apple Inc is getting resources from the market. To build an iPhone or and products from Apple Inc, the company need to get many different resources from the market in order to produce a good. Apple Inc needs to get resources such as computer chips and various other resources from many other companies or firms to put together an iPhone. Thus, the amount spent on resources to produce the goods is the opportunity cost of production that Apple Inc faces. In my opinion, If Apple Inc are in the long run time frame, they should increase their labor and also increase the number of  factories for production in order to obtain more profit in the future eventhough it may cost the company a big sun of money to do so. For example, Apple Inc should build more manufacturing plants and factories to increase the level of output so that they can satisfy the demand from the consumers. 

Therefore, Apple Inc should think about the change in supply and demand if they were to increase the price of their products. Besides that, they are also selling goods that are perfectly elastic in demand which consumers will choose to buy from another company if the prices of the goods have been increase because the functions of the products are similar to one another.

Author: Student ID- 1001A76785

DHL Increase Rates in Malaysia by 4.9%

According to the article “DHL increases rates in Malaysia by 4.9%” by theSun daily on the 27th Septermber 2012, this news article says that DHL Express, a German express service company will increase its price for its services by 4.9% effective by Jan 1 2013. The main factor for the raise in price is due to the general price inflation for the express industry and the company CEO also states that the increase in price will bring a better delivery performance for the customers.

DHL Express is a company that offers parcel delivery services from one country to another or from within a country. Based on my opinion, an increase in price for the services from the company would lead to two scenarios. First of all, if DHL Express were to increase the price for the services, then the quantity supplied of the service by the company would increase as well because by increasing the price charged to customers per service, it would lead to a greater profit per service. Therefore, more services will be supplied by DHL Express in order to maximize their profit. The 'The Law of Demand' states that when the price of a good or services is increased, then the quantity demanded would decrease. Therefore, the demand curve will shift to the left due to the decrease in quantity  demanded.  The 'The Law of Supply' also states that if other things remain the same but the higher the price of a good or services, the higher is the quantity supplied. This would shift the supply curve to the right. The demand of services for this company is also affected by substitution effect, which says that when the relative price of a good or services rises, people seeks for substitute  for it, and this will decrease the quantity demanded of the goods or the services. In this case, consumers might seek for other companies such as Skynet or FedEx. Besides that, the demand is also affected by the income effect as when a price of a good or services rises relative to the income, this will cause people to not be able to afford all the things they previously are using or are buying, so the quantity demanded for the good and services decrease. For example, if the price of services increase and income remains the same, consumers would have to cut the use of the services and seek for cheaper substitute. On the other hand, quantity supplied is affected by the prices of factors of productions, when the price of a factor of production used to produce a certain good or service increase, the minimum price that the supplier is willing to accept for producing each good and service rises. In my opinion, DHL Express uses transportation such as trucks and lorries to deliver their services and if the price petrol increase, then they would have to increase the price of their services. This is one of the reasons why DHL Express has to increase their price in the coming year because there will be an increase in offsetting and external cost that could not be control by the company.

Price elasticity of demand is the responsiveness of the quantity demanded when there is only a change in price. As there are many other companies in the market that provides similar services as DHL Express such as FedEx or Ups, which is also the competitor of DHL Express thus making it a fierce competition in the market. The services provided by DHL express would have a high elasticity of demand. This is because when a customer wants to choose a company that does the same services, the customer would usually compare the prices between both the companies and choose the company that gives the best price. Hence, if DHL Express’s price is higher compared to their competitiors, customers would usually choose the company that is cheaper which makes DHL Express a company that has a high elasticity of demand because there is a perfect substitute for it.  There would also be a rise in the cross elasticity of demand for the other companies if there were to be a increase in price of DHL Express, the substitute companies would have an increase in cross elasticity of demand as they are close substitutes. The other factor that influences the price elasticity of demand is the proportion of income spent on the services, for example, if DHL Express were to increase the price of its services, then it would have a more elastic demand because now people would choose other company for its services as it may be cheaper.

In order for DHL Express to maintain their market sales, a latest technology and innovation would have to be offered by the company to have an edge over their competitors. To maximize the company’s profit, the technology constraints that almost every firm faces would have to be overcome by DHL express because technology constraints means that a company is stuck as they need latest technology in order to speed up the process or smoothen the operations. If DHL Express were able to come out with the latest technology to enhance the speed of transportation for parcel delivery from one destination to another, it would have and edge it's competitors and consumers would still pay for their services eventhough its slightly more expensive. From my point of view, DHL Express should be in the long run. The long run is a time frame by which the quantities of all resources can be varied and the decisions are not easily reversible. Thus, DHL Express should establish more headquarters around the world and purchase more transportation vehicles such as ships, airplanes, trucks and employ more labor forces so that the operations would run smoothly and make parcel delivery faster for the benefit of the customers although this maybe costly to the company.

In my opinion, DHL Express should not increase the price of their services higher than their competitors as consumers will start looking for substitutes if prices are charged too high as DHL Express is a company that has a high elasticity of demand. The company also has to come up with new technology to fasten the speed of delivery so that consumers would not hesitate to pay a higher price for better services.

 Author: Student ID- 1001A76785

Fashionista Need Not Sweat Over Inditex Rising Prices

Based on the article ‘Inditex to maintain prices,will absorb Vat tax hike', fashion retailer and owner retail chains of Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque have announced on July 11, 2012 that it will absorb VAT tax hike imposed by the Spain government. Loyal customers of the retail chains need not worry the increase in price of the items.

The Spain government has announced an increase in the general VAT rate from 18% to 21% in order to meet requirement agreed with Europe. However, Inditex, world’s largest fashion retailer and owner of group’s retail chain such as has made decision to absorb the VAT tax hike and maintain its prices. The company said in a press release, “Inditex is maintaining its price stability policy which it used to absorb Spain’s last VAT hike by identifying efficiencies in other parts of the business.” When government imposed tax on an item, the burden of a tax is divided between buyers and seller which is known as tax incidence. If the price of an item rises to the full amount of the tax, buyers would have to bears all the taxes. If the price doesn’t rise at all, the sellers bear the tax. In this case, Inditex is determined to bear the taxes and will not pass on the Spain’s VAT-rate hike to its customers. When sellers pay the tax, the amount of price is decrease by the amount of tax paid. For example, the price of a t-shirt without tax is $10 and 100 pieces is sold per week. Now, a tax of $2.50 is absorbed by the seller which is Inditex and it is only willing to supply 100 t-shirt at the price of $12. Thus, a new supply curve(S+tax on sellers) shift leftwards and new equilibrium is achieved. The equilibrium quantity decreases to 50 pieces per week, the price paid by buyers rises to $11 and the price received by sellers falls to $9.50 per piece.

-Tax on Seller graph-

It is said that the demand from consumers will not change after Inditex absorb the VAT tax. However, I think that Inditex might reduce the price of its items so that quantity demanded will increase and more profits can be earned to cover the losses. According to ‘The Law of Demand’, if the price of the good decreases, quantity demanded will increase, provided other factors remaining the same. Items like shirt, trousers, dresses supplied by Inditex have high elasticity of demand. This is because clothes have close substitutes and can be find everywhere unless you are brand conscious like me. If the items already have high elasticity of demand, tax imposed will be covered by the sellers. No buyers are willing to pay a high price for goods that can be found elsewhere. For example, if Zara sell a dress in $179 which includes $20 tax and Mango sell a similar dress in $159 which doesn’t include tax, obviously I would go for the one which cost less. Thus Zara have to bear the $20 tax and lower the price to $159 to attract consumers.

-Tax with Perfectly Elastic Demand graph-

From my observation, the prices of clothes in Zara are getting less expensive. This may be one of their sales strategies to gain more customers and earn more profits. Nevertheless, consumers are not neglected to gain benefits. Customers gain consumer surplus when received excess benefit from a good over the amount paid for it. In this case, consumers gain happiness out of wearing the beautiful clothes which makes them look ravishing. They do not concern about the low price deal. Obviously, the sellers are not at loss too. It’s a win-win situation. Producer only sell when they are willing to accept the price sold. Sellers gain producer surplus when they have excess amount of benefit from the sale of a good over the cost of producing it. Let say the cost of producing a dress is $50 and the market value is $150. The producer gets $100 profit due to high market value. Therefore, the consumer surplus and producer surplus are maximized and the market is efficient.

In addition, a tax imposed will change the price that buyers are willing to pay (marginal social benefit) and the price that sellers are willing to receive (marginal social cost). A tax makes marginal social benefit exceed marginal social cost which shrinks the consumer surplus and producer surplus, and creates deadweight loss (insufficient quantities provide to the society). Although, Inditex claimed to absorb the VAT tax hike, but there are chances a small amount of the tax is included in the price of the items. Of course, these are just my point of view.

For example, with no tax, 5000 dresses are produced in a week and the price of a dress is $200. When government imposed a 10% tax, the cost of the dress becomes $220 and the tax burden is shared between buyers and sellers. The buyers’ price rises to $205 and the sellers’ price drop to $185. Furthermore, the quantity decreases to 4000 dresses a week. Consumer surplus shrinks to the green area and producer surplus shrinks to the blue area. Part of the loss of consumer surplus and producer surplus goes to the government as tax revenue (pink area) and other become a deadweight loss to the society(gray area).

 -Taxes and Efficiency graph-

Any firm’s goal is to maximize profit including Inditex. Yet, Inditex will find it hard to maximize profit when they decide to absorb the Spain’s VAT-rate hike. Inditex might face a market constraint. The price of goods sold received by Inditex is now reduced by the amount of tax so Inditex will have to find ways to expand their market to increase sales. Moreover, they will have to compete with other firms’ marketing efforts. In addition, the tax paid by Inditex could have been use to serve other purposes. The opportunity cost of paying tax could be developing a more advanced capital to increase output or buying a land to expand their brand.

Author: Student ID: 0312558

Staying Ahead in Rubber Glove Industries

Based on the article, ‘Staying on Top of The Game’ written by Yvonne Tan in The Star newspaper, Top Glove Corp Bhd. is confident to expand its business to the Asian markets. Tan Sri Lim Wee Chai, chairman of Top Glove Corp Bhd. shares his strategies and opinion with us.

It is known that raw materials are known as scarcity resources. Converting raw materials such as palm oil, rubber and cocoa to a finish product involve all factors of production. Recent news states that insufficient supply of rubber has become a major concern to local rubber companies. However, Top Glove is not afraid but ready to face this matter. Once rubber becomes scarce, the amount available to the market is limited but the demand is still there. When the quantity demanded exceeds quantity supplied, shortages occur. Thus, price of rubber, in another word, latex increases. Top Glove plans to reduce the risk of high price latex which accounts for up to 60% of its production costs by buying its own land to plant rubber trees and thereby getting its own latex supply. Nevertheless, the company incurs an opportunity cost of production. In my opinion, it could have sold or rented out the land to another firm to earn more revenue.

In recent years, all Malaysian glove maker firms have been increasing their production capacities especially for nitrile gloves because rubber gloves are getting expensive to produce due to uptrend of latex prices. This has sparked concerns about the issue of oversupply of nitrile gloves. However, Top Glove owner, Tan Sri Lim Wee Chai says “It’s a normal situation, there will be oversupply, then the supply will reduce, the demand will increase…there is always a cycle, so we are not worried.” I agree with his statement. This is because in market equilibrium, when quantity demanded equals quantity supplied, the equilibrium price is achieved. At one point where quantity supplied exceeds quantity demanded, there will be an oversupply. However, some producers unable to sell their goods as planned will reduce the prices; resulting in price falls till equilibrium. The falling price increases quantity demanded and decreases quantity supplied. When quantity demanded exceeds the quantity supplied, shortage occurs. Producers will set to increase the price and output, thus pushing the price up until its equilibrium. The rising price reduces shortage as it decreases the quantity demanded and increases the quantity supplied. Eventually, surplus and shortage will occur again due to price affecting the plans of buyers and sellers. 

-Supply and Demand Curve-

 In addition, Top Glove targets one new customer per week which equivalent to 52 customers per year. However, to make that possible, the company has to hire more people in tandem with growth in demand for both rubber and nitrile gloves. Their productions consist of 80% of rubber gloves and hoping to have a more balanced mix of rubber and nitrile gloves. In order to produce more of nitrile gloves, production of rubber gloves will be lower. In economic terms, the opportunity cost of nitrile gloves is the lower production of rubber gloves and trade off comes along with every choice made. In this case, the company trade off rubber gloves for nitrile gloves. Production efficiency is achieved when more nitrile goods are produced with the sacrifice of rubber gloves at the lowest possible cost. Let’s take a look at the PPF (Production Possibilities Frontier). PPF shows the boundary between those combinations of goods and services that can be produced and those that cannot. The goods involved now are nitrile and rubber gloves.

 -PPF and Opportunity cost-

When all the points fall on the Production Possibilities Frontier (PPF), production efficiency is achieved. It is impossible to attain points outside the PPF because resources are scarce yet any points inside the frontier will be consider inefficient, either resources are misallocated of unemployed. Furthermore, the slope of the PPF shows marginal cost of a good. At an instance, the marginal cost of nitrile gloves is the opportunity cost of producing one more unit of it. An additional unit of nitrile glove produced will reduce the production of rubber glove. Due to difference in resources productivity, the shape of PPF bows outwards. This shows that with the increase of nitrile gloves production, its opportunity cost increases too.

Top Glove decides that the production of both gloves will be based on demand. In my opinion, this is a smart move. Over the years, the quantity demanded for nitrile gloves rises due to expensive rubber gloves. According to ‘The Law of Demand’, the higher the price of a good, the smaller the quantity demanded provided other factors remaining the same. Consumers will seek substitute once the price of rubber gloves increases. For example, the price of a rubber gloves is equivalent to two nitrile gloves. Therefore, consumers will go for the nitrile gloves. In this way, Top Glove can re-allocate their resources and plan on the productivity of both gloves.

Since nitrile gloves are a close substitute for rubber gloves, the demand for rubber gloves is said to be elastic. If the percentage change in quantity demanded exceeds the percentage change in price, the good is said to have an elastic demand with price elasticity greater than 1. As I mentioned earlier, the increasing price of latex is causing difficulty to produce rubber gloves. Thus, Top Glove seek alternative by producing nitrile gloves using the factors of production used for producing the rubber gloves. As a result, the elasticity of supply for nitrile gloves is elastic.

Business in rubber gloves industry is set to be challenging. Top Glove is facing market constraints while competing with rivals. “When a company has grown to a certain size, continuous growth will be more challenging, so this is our idea for now. Obviously, there is a plan to achieve this,” says Tan Sri Lim Wee Chai. Top Glove is determined to grow their market share to 30% and achieve an increase in sales and net profit by between 10% and 20% per year. Another constraint face by Top Glove is hiring the right people. According to Tan Sri Lim Wee Chai, expanding company requires good people and teamwork from all departments. Currently, the staff strength in Top Glove is approximately 11,000 with 23 manufacturing facilities spread across Malaysia, Thailand and China. Top Glove is determined to remain efficient, improve technology, meet all of the customers’ requirements and have reasonable pricing in their product to cope with economic problem.

Author: Student ID: 0312558