# The Price Elasticity of Demand for the Apple iPad

According to an article appearing on Bloomberg.com, the marginal cost of manufacturing the 16-gigabyte Apple iPad is around \$260. This includes \$95 for the touch-screen display and \$26.80 for the device’s processor. Flash memory accounts “… for \$29.50 in costs on the 16-gigabyte model, \$59 in the 32-gigabyte version and \$118 in the 64-gigabyte model. The differences in flash memory costs “…push the cost of manufacturing the 32-gigabyte version of the iPad, which sells for \$599, to \$289.10. They boost the cost of the 64-gigabyte version, which sells for \$699, to \$348.10.”

Obviously, Apple has very healthy profit margins on these devices; roughly 48% for the 16-gigabyte iPad, 52% for the 32-gigabyte iPad, and 50% for the 64-gigabyte iPad. From this information, we can also infer the price elasticity of demand for these products. Price elasticity is a measure of the percentage change in quantity demanded associated with a one percent change in price.

From basic price theory, we know that marginal revenue MR = P(1 + 1/, where P is price and corresponds to the price elasticity of demand. We also know that the optimal output decision for a profit maximizing firm involves setting quantity such that marginal revenue is equal to marginal cost; i.e., MR = MC.  Thurs, we can rewrite the marginal revenue equation in the following manner: MC = P(1 + 1/—> MC = P + P(1/ therefore, (MC – P)/P = (1/—> = P/(MC – P) Applying this equation to the various iPad models that are currently for sale, we find that

1. the price elasticity of demand for the 16-gigabyte iPad is = P/(MC – P)
= 499/(260-499) = -2.09;
2. the price elasticity of demand for the 32-gigabyte iPad is = P/(MC – P)
= 599/(289-599) = -1.93; and
3. the price elasticity of demand for the 64-gigabyte iPad is = P/(MC – P)
= 699/(348-699) = -1.99;

Any number less than -1 for indicates that demand is relatively elastic. This implies that if Apple were to change prices from current levels, then the percentage change in quantity demanded would exceed the percentage change in price. In other words, if Apple dropped prices, revenue would increase because of a larger quantity response, and if Apple raised prices from current levels, then revenue would decrease due to a disproportionate decline in quantity demanded.

Putting this into perspective, the price elasticity of demand for the various flavors of the Apple iPad is greater in absolute terms than the price elasticity of demand for the Apple iPhone (see Dartmouth economist Robert Hansen’s blog entry from June 2009 entitled “Apple iPhone Price Elasticity” in which he calculates that the price elasticity of demand for the iPhone 3G S is -1.43). Also see “Apple iPad and the price elasticity equation”.

Here’s a list of articles that I have been reading lately (organized by topic):

Economics

Hearing Problems at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with I

Source: www.thebigquestions.com

“During a belated conversation about health care policy, a colleague remarked that “of course, nobody would want to live in a world where rich people and poor people got the same kind of health care”. The economists around the table all nodded in agreement and moved on to matters that were actually controversial. It occurs to me that had there been a few non-economists at the table, someone might have objected to my colleague’s matter-of-fact (and surely accurate) observation. And it occurs to me also that maybe there’s a general lesson here about how economists communicate-or fail to communicate-with the world at large.”

 Health Care Reform Source: www.theatlantic.com “The head of the IRS seems to be confirming what we suspected:  the agency is going to enforce the mandate by deducting any penalties from your tax refund, not by using its other enforcement authorities such as the ability to file tax liens.”
• James A. Klein: The White House and the Writedowns – WSJ.com

Source: online.wsj.com

“In The Wall Street Journal, James A. Klein of the American Benefits Council points out that the White House wants companies to ignore known costs and book speculative future savings. Sounds like Enron accounting.”

Source: online.wsj.com

“The Wall Street Journal describes What happens when all medical decisions are political.”

Politics

 What 1946 Can Tell Us About 2010 — The American, A Magazine of Ideas Source: www.american.com “It is interesting to look back at the biggest Republican victory of the last 80 years, the off-year election of 1946. What’s similar and what’s different today?”

Public Policy

• The FCC Loses—Again – WSJ.com

Source: online.wsj.com

“The Wall Street Journal writes that a federal appeals court ruled yesterday that the Federal Communications Commission lacks the authority to regulate how Internet service providers manage their networks is a validation of the rule of law.”

• Holman Jenkins: End of the Net Neut Fetish? – WSJ.com

Source: online.wsj.com

“Holman Jenkins writes in The Wall Street Journal that a federal court says no to an FCC power-grab.”

 Peter J. Wallison and David Skeel: The Dodd Bill Means Bailouts Forever – WSJ.com Source: online.wsj.com “In The Wall Street Journal, Peter J. Wallison and David Skeel say that the FDIC should not be given a resolution authority to handle failing, large nonbank financial institutions. The Lehman Brothers liquidation shows that bankruptcy works fine.”

Source: online.wsj.com

“The Wall Street Journal writes that the Labor Department is making it illegal to work for free.”