Jul
15

The Economics of Tablet Sales

The Economics of Tablet Sales

July 15
By

Being an economics major, I’ll admit that often times I view occurrences in the world and wonder what economic principles are behind them.  So obviously when I was on the RCP Magazine website and I came across an article Is the Tablet Moment Over? by Scott Becker, I began to consider the economic reasons behind why there has been a decrease in the number of tablets sold for certain companies while the number of tablets sold for other companies has increased. Below is the graph that Becker included in his article showing that tablet brands such as Apple and Amazon have decreased in number sold while others, such as Samsung and Lenovo, have increased in number of units sold.

tablet vendors and shipments

So what economic principles might explain this occurrence?  For my analysis I focused on the Apple brand and their decrease in sales since they were really the first company to launch a successful line of tablets. In my breakdown, Apple is part of a perfectly competitive market—the tablet market—and one of many suppliers. A few of the conditions that determine if a market is perfectly competitive or not are:

  1. All information is known by all the producers. If someone does something, say, renovations, then all the other suppliers will know how to make those same renovations.
  1. There’s such a large number of suppliers that one firm in the market will not affect the supply curve.
  1. All the firms face the same cost curves.

Obviously these perfectly competitive markets do not occur very often in the real world and the tablet market is not really a perfectly competitive one. But using the principles behind this type of market is still a valuable tool for explaining what is happening right now in the tablet market.

In the graphs below we have the year 2009 and what the tablet market and a specific firm (Apple) in that market look like. We can see that because we are in a perfectly competitive market, and because Apple is one of many firms, the demand curve is constant or equal to the price where the supply curve and demand curve intersect in the market. So no matter how much or how little this firm supplies it will not be able to affect the price of the product.

two Atwo B

An important principle for perfectly competitive markets is the idea of equilibrium. In 2009, the tablet market is in what is known as long-run equilibrium. This occurs when the price and quantity of the product are where the supply curve and the demand curve in the market intersect and the firm is producing at a point where there is no incentive for firms to enter or leave. Firms maximize their profits when MC (marginal cost) is equal to MR (marginal revenue). In a perfectly competitive market, firms face a horizontal demand curve so they receive the same price for every tablet they produce. This means that the additional amount of money received for each tablet produced, or MR, is constant and happens to be equal to the demand curve. Because of this, firms will produce where their MC curve intersects the demand curve in order to maximize profits. When this intersection occurs at the minimum of the ATC (average total cost) curve the firm is simply making up their costs[1], they are not making any economic profits so there is no incentive for firms to enter or leave the market[2].

three AThree B

In the year 2010, Apple came out with the first iPad and as a result there was a huge increase in demand for tablets resulting in an outward shift in the demand curve. Because of this giant increase in demand the equilibrium price for the tablets went up. This resulted in a shift in the demand curve for the firm and therefore an increase in the price and MR that the firm will receive for each tablet produced.

Four afour bfour c

Now because of this large increase in demand the firm has a new optimum amount of tablets to sell. They will still produce at the point where MC=MR but now their MR has shifted up so they will be producing at a different spot on the MC curve.  If we look at this new point of intersection we can see that at this quantity the price we are receiving is above our ATC curve. This means that we are now making economic profits or, in other words, we are making more than our opportunity cost or what we could be making in any other market. Another name for these economic profits is rents[3] which is how they are displayed in the below graph. The area of the entire green square represents the economic profits that Apple is now making. Because of this economic profit, firms have an incentive to enter the market and therefore we are no longer in long run equilibrium.  As of right now the market is in what is known as short-run equilibrium which occurs when the market is in equilibrium but because of economic profits or losses there is incentive for firms either to enter or leave the market.

five afive b

 

As stated before the economic profits now being made by Apple encourage other firms to enter the market. As more and more firms enter, the supply curve will continue to shift out, which will continue to decrease the price that firms will be getting for the tablets all the way until we are back at the same optimum price that we had in 2009. Once again, we are in long-run equilibrium and there is no more incentive for firms to enter or leave the market.

six a six b

 

This is possibly where we are at right now in the tablet market. Apple started out as the big supplier but when other firms saw the profits that they were making they wanted to enter the market. Since 2010, when the iPad came out, there have been many different types and versions of tablets produced by many different companies, and every time a new company enters the market, the supply curve will shift out causing the demand curve faced by Apple to shift downward. These incumbent firms will experience an increase in sale of their tablets simply because they weren’t even in the market before and were therefore not producing any tablets at all. Still, every time the demand curve for Apple shifts downward as a result of these incumbent firms, Apple will produce fewer tablets than they were before.

Now as said earlier this is not a perfect analysis of what is really going on in the tablet market since the tablet market is not perfectly competitive.  However, these economic principles still shed some light on what is going on in the current tablet market.

Photo credit: Wikimedia commons


 

[1] Many are confused by the idea that a firm would be happy staying in this market when they are only making up their costs and not making economic profits.  Economic costs and profits are different from accounting costs and profits, however, and so even though it sounds like the firm is not making any money, they really are.  Economic costs take into account opportunity costs.  An opportunity cost is basically the highest amount of money that someone could be making if they weren’t already working at the job that they are currently at.  So when a firm is just making enough to cover their ATC they are making their opportunity cost so they really are making accounting profits they just aren’t making economic profits which occur when a firm makes more than their ATC.

[2] One of the assumptions for perfectly competitive markets was that all firms face the same cost curves and therefore all firms have the same opportunity costs.  Since this is the case firms have no incentive to enter since they could be making the same amount of money in any other market so there is no point.  Also firms have no incentive to leave because no matter where they go they will make the same amount of money that they are already currently making in this market.

[3] Just a little clarification on the word “rents.”  Rents imply economic profits that cannot be taken away.  For example, if a firm came up with an improvement to a product that lowered their ATC curve and none of the other firms could copy this then they would be making economic rents because their cost would be lower than the market price.  This type of scenario would indicate that the market was not perfectly competitive however because not all the information was public knowledge.  We will see that the economic profits that Apple is making in our example are not really rents because they are driven away so the use of this word on the graph is not completely accurate.