2020

Assignment # 1 – Apple Watch

BUSINESS ECONOMICS – MS IBF
OSAMA ALI

33.5/40
Good work
Q#1 2/2

The smartwatch market, like any other market, consists of buyers and sellers of smartwatches.
The buyers are primarily smartphone users looking for wireless communication and interaction with the
smartphone’s applications. Secondary buyers are those who are health-conscious and wish to monitor
their vitals and health-related activities. The three needs / wants to be fulfilled by smartwatches include:
1. Personal assistance and information, along with interaction with applications
2. Health monitoring and communication with health professionals
3. Wireless communication, smart home functions, and social and financial networking
The sellers in the smartwatch market are Samsung, Pebble, Sony, Moto, LG Electronics, and other
small producers. Three of the top producers along with their differentiating features are given below:

Sellers Differentiating Features

Gear Live: Connectivity to Android Phones and access to applications,

Samsung
1.63-inch Super AMOLED 320 * 320 display

Pebble Pebble Steel: Sleek steel and leather design, 6-day long battery life

Moto 360: Designed as a traditional watch, android connectivity, water-

Motorola
resistant

Q#2
2/2
a. Apple Watch is a Consumer Good, since it is being produced for present consumption, and will
not be used in the production of other goods over time.
b. Study of the Smartwatch Industry is a Microeconomic topic, since it deals with an individual
industry, and does not discuss national output or national product.

Q#3 Sales ($)

Smartwatches
6 Billion

Traditional Watches

1/3
you should have shown demand/
supply for each market and then
2014 2018 2020 Time (Yrs.)
shift demands according to the
information
Assumptions:

• Growth in the Traditional Watch market will remain constant.

 • Ceteris Paribus: All Macroeconomic Indicators will remain constant.
• The industry will remain insulated from local and external shocks.
• Smartwatches will primarily remain complementary to smartphones.

Q#4
Smartwatches 3/3 good
(a) Price ($) (b)
Price ($)

Quantity Quantity
(Units) (Units)

Compatible Smartphones

(a) Price ($) (b)

Price ($)

Quantity Quantity
(Units) (Units)

Substitute Smartphones
(a) Price ($) (b)
Price ($)

Quantity Quantity
(Units) (Units)
 Accessories are usually complementary goods to the primary product. As shown in the diagram
above, a change in the price of smartwatches will inversely affect the `quantity of smartwatches
demanded (a movement along the curve), which will consequently lead to a change in the demand for
smartphones (a shift in the demand curve). Therefore, if, for example, Samsung decides to decrease the
price of its Gear Live (shown in diagram b), it will lead to an increase in its quantity demanded,
subsequently leading to an increase in the demand for Samsung Smartphones. Thus, smartphone users
could be lured into switching between smartphones by managing the price and attributes of
smartwatches.

Q#5
(a) Dependent Variable: QAW (Quantity demanded of Apple Watch per week) 1/1
(b) Independent Variables:
i. PAW (Price of Apple Watch – dollars per unit)
ii. PGearS (Price of Samsung Gear S Watch – dollars per unit)
1/1
iii. PPebble (Price of Pebble Steel – dollars per unit)
iv. PiPhone6 (Price of the midrange iPhone 6 Smartphone – dollars per unit)
v. A (Quarterly targeted advertising budget – thousands of dollars per quarter)
(c) Coefficients: 2/5
i. PAW – Negative (Price of Apple Watch is inversely related to the quantity demanded
of Apple Watch)
ii. PGearS – Positive (Price of Samsung Gera S is directly related to the quantity
in ii - iv, should demanded of Apple Watch)
have mentioned
iii. PPebble – Positive (Price of Pebble Steel is directly related to the quantity demanded
subtitute/comp.
of Apple Watch)
iv. PiPhone6 – Negative (Price of iPhone 6 is inversely related to the quantity demanded
of Apple Watch)
v. A – Positive (Advertising budget is directly related to the quantity demanded of
Apple Watch)

Q#6
i. 1/1
QAW = -150,000 -2,400 PAW + 1,520 PGearS + 1,200 PPS - 1,200 PiPhone 6 + 44 A
Quantity Price Price Price Price Advertising
(Apple Watch) (Apple Watch) (Gear S) (Pebble Steel) (iPhone 6) Budget
177,200 349 380 220 299 15,500
ii. 2/2
QAW = -150,000 -2,400 PAW + 1,520 PGearS + 1,200 PPS - 1,200 PiPhone 6 + 44 A
Quantity Price Price Price Price Advertising
(Apple Watch) (Apple Watch) (Gear S) (Pebble Steel) (iPhone 6) Budget
294,800 300 380 220 299 15,500
270,800 310 380 220 299 15,500
246,800 320 380 220 299 15,500
177,200 349 380 220 299 15,500
174,800 350 380 220 299 15,500
150,800 360 380 220 299 15,500
102,800 380 380 220 299 15,500
78,800 390 380 220 299 15,500
54,800 400 380 220 299 15,500

iii. 3/3

Apple Watch
450
400
350
300
250
Price

200
150
100
50
-
- 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Quantity Demanded

iv. Changes in each of the given situations: 2/2

i. Increase in the Price of AW from $349 to $400

Apple Watch
500 400,54800
400 349,17720

300
Price

200

100

-
- 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Quantity Demanded
 An increase in the price of AW will lead to a decrease in the quantity demanded of Apple
Watches, a movement along the curve as depicted above.

ii. Increase in the Price of Gear S from $380 to $400 2/2

Apple Watch
450
400
PGearS = $400
350
300
250 PGearS = $380
Price

200
150
100
50
-
- 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Quantity Demanded

An increase in the Price of Gear S will lead to an increase in the Demand for Apple Watch
and will shift the Demand Curve of Apple Watch to the right, as depicted above. Apple
Watch and Gear S are Substitute Goods.

iii. Decrease in the Price of Pebble Steel from $220 to $150 2/2

Apple Watch
450
400
PPebble = $220
350
300
250 PPebble = $150
Price

200
150
100
50
-
(50,000) - 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Quantity Demanded

A decrease in the Price of Pebble Steel will lead to a decrease in the Demand for Apple
Watch and will shift the Demand Curve of Apple Watch to the left, as depicted above.
Apple Watch and Pebble Steel are Substitute Goods.
 iv. Decrease in Price of iPhone 6 from $299 to $250 2/2

Apple Watch
450
400 PiPhone6 = $250
350
300
Price 250 PiPhone6 = $299
200
150
100
50
-
- 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
Quantity Demanded

A decrease in the Price of iPhone 6 will lead to an increase in the Demand for Apple Watch
and will shift the Demand Curve of Apple Watch to the right, as depicted above. Apple
Watch and iPhone 6 are Complementary Goods.

v. Increase in Advertising Budget from $15,500 to $17,000 2/2

Apple Watch
450
400 A = $17,000
350
300
c A = $15,500
250
Price

200
150
100
50
-
- 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000
Quantity Demanded

An increase in the Advertising Budget will lead to an increase in the Demand for Apple
Watch and will shift the Demand Curve of Apple Watch to the right, as depicted above.
The Advertising Budget is directly related to the Demand for Apple Watch.

Q # 7 (The second question marked as 6) 0/1

The marginal cost of producing one more Apple Watch is $178 (the variable cost).
Q # 8 (The question marked as 7)
(a) Impact of Apple’s entry on other suppliers 0.5/1 their supply will shift to the right due to lower costs
Other suppliers will be happy with Apple’s entry into the smartwatch market, since the
market would expand due to increased innovation, lowering costs, and increased margins.
Although Apple would reduce the percentage share of all the other players in the market, the
resulting expansion of the market will increase each players’ profits in the long-term, a result of
increased competitiveness of the market. In other words, Apple’s entry into the smartwatch
market will increase the Production Possibility Frontier for the entire industry, as depicted below:

Capital Goods

Post-2014

Pre-2014 Smartwatches

(b) Impact on the Healthcare Industry 1/1

The Healthcare Industry will also benefit since there will be increased interest in fitness,
exercise, and general wellbeing. An increase in the use of smartwatches will enable real-time
health monitoring and will give doctors necessary feedback regarding their patients’ wellbeing.
(c) Impact on Society in general.
1/1
The society would also benefit from the increase in consumer choice, more employment
opportunities, and increased awareness regarding healthcare and wellbeing.

Q # 9 (The question marked as 8) 3/3

(a) Yes, I own a smartwatch named Mi Band 4, produced by Xiaomi.

(b) I didn’t have to buy it, since it was delivered as a complementary gift with the Smartphone I had
purchased, the Redmi Note 9S produced by Xiaomi. Its Market Price at the time was around Rs.
4,000.
(c) This question is not applicable in this case.
(d) I didn’t have to make any such decisions.
(e) My choice was regarding smartphones. I chose Xiaomi’s Redmi Note 9S because it provided the
best specifications within my budget among all other substitutes, such as Oppo’s Realme,
Samsung’s Galaxy Series, Huawei’s Mate Series, etc.
(f) No, I wouldn’t be interested in buying an upgrade, although it is available as the Mi Band 5.
(g) The reason being that I do not feel that their will be any additional utility gained by upgrading, the
current smartwatch is enough for my use.
(h) According to online sources, a used Mi Band 4 Smartwatch could be sold for around Rs.3,000,
around 75% of its original price.
(i) The Opportunity Cost of not selling it would be any utility gained from Rs.3000.