INSTITUTE OF BUSINESS ADMINISTRATION, KARACHI

26.4/40

BUSINESS ECONOMICS
ASSIGNMENT #1

1. Describe the smart watch market.

A product market is a place where final goods or services are sold to an individual or an
organization, an as the name suggests smartwatch market deals with the buying and selling of
smartwatches. Smartwatches are wearable gadgets that are similar to a wristwatch in outlook
but provide multiple smart features while being paired through an application with other
gadgets like cell phone and tabs.
a) Who are the buyers? Identify three needs/wants of the consumers that a smart watch fulfills.
Buyers of the smartwatch: 1/1
Any individual or individuals that are tech savvies with a keen interest in making their
Smartphone activities efficient and convenient.
Their needs/wants could be as follows:
1. To be able to handle the functions in their smartphone without having to unlock their cell
phones.
2. To track or improve their fitness regime.
3. To be able to use sensory functions.
b) Who are the sellers? Identify three sellers and highlight their differentiating features.
Sellers of the smartwatch: 0.9/1
Companies that are producing smartphones or their accessories may be the sellers of
Smartwatches. Following are the three well known smartwatch sellers and what competitive
advantages they have over each other:
1. Samsung: providing the biggest user interface.
2. LG: providing the most thin sleek smartwatch not in case study
3. Pebble: providing a smartwatch with battery time of up to 6 days.

2. Choose the right option in the below statements about the smart watch industry and explain
your choice very briefly.
Apple watch is a consumer/capital good?
Apple watch is a consumer good, due to the fact that it provides its' consumers with
2/2
functionalities that are fairly independent and it does not directly aid any other business in
doing their core business.
Study of the smart watch industry is a microeconomic/macroeconomic topic.
Study of the smartwatch industry is a microeconomic topic since it deals with a specific industry
and not gauging multiple economies in it.
 3. The Smart watch Group predicted 250% annual growth in sales of the smart watch industry
for several years. The industry sales were low till middle of 2014 (about 700,000 smart
watches shipped worldwide). But the sales were expected to surpass traditional watch sales in
2018 and become a six-billion-dollar market by 2020. Sketch a diagram for (a) smart watch
market and (b) traditional watch market to reflect the above scenario i.e. reflect the growth
from 2014 to 2020. State your assumptions. 1/3
you should have shown demand/supply
for each market and then shift demands
Annual Growth according to the information
5000000
4500000
4000000
Sales in thousnd dollars

3500000
3000000
2500000
2000000 Annual Growth
1500000
1000000
500000
0
2013 2014 2015 2016 2017 2018 2019 2020 2021
Annual increase of 250%
a)

Sales Growth
70000

60000
Sales growth in dollars(Lac)

50000

40000

Sales Growth
30000

20000

10000

0
2014 2015 2016 2017 2018 2019 2020
b)

Assumption:

1. Citeris peribus, Annual growth is 250%.

2. Sales are projected on the basis of 250% annual growth with the initial value of $700,000.
 4. Explain, using a demand-supply diagram, the “complementarity between smart watches and
phones”. How are the “attributes and pricing of accessories such as smart watches a key
weapon in the mobile phone competitive battle”?

0/3

Dphone SPhone

DSmartwatch Ssmartwatch
Price

Quantity

Above figure shows the equilibrium graph of Phone (Red) and Smartwatch (Blue) and how they are
complementarities to each other. Their demand curve and supply curve clearly depicts how both of the
products demand is dependently indirectly proportional to change in price and their supply curve shows
a dependently directly proportional relation to change in quantity.

This clarifies the fact that if a seller manipulates the prices of smart watch or provide such attributes in
smartwatch that it attracts the market, it will have a (direct) positive effect on quantity demanded of
phones.

5. Consider Figure 1 on Page 5 of the case study which shows the Apple Watch pricing strategy
and answer the following questions.

a) What is/are the dependent variable/s in the model?

1/1
The quantity demanded of the apple watch is the dependent variable in this model as it equates to the
sum of all other independent variable.
1/1
b) What is/are the independent variable/s in the model?

Price of the Apple Watch, Price off the Samsung Gear S watch, Price of the Pebble Steel, Price of a mid
range Iphone 6 and the quarterly advertising budget; are all independent variables.

c) Explain the “sign” of the coefficients of the following variables i.e. explain why the coefficient of the
variable is negative or why it is positive? Use the right terminologies. 5/5
i) PAW: The negative sign show that the relation between price and demand of apple watch is inversely
proportional, i.e. decrease in price would lead straight to an increase in quantity demanded.
ii) PGears: As Samsung Gear S is a substitute in the market it has a positive sign showing the positive
relation between price of PGears and QAW.

iii) PPebble: As Pebble Steel is a substitute in the market it has a positive sign showing the positive relation
between price of PPebble and QAW.

iv) PIphone6: Due to the fact that Iphone6 has a complementarity relation with Apple Watch, there is a
negative sign showing the inverse relation between PIphone6 and QAW.

v) A: The positive sign shows the directly proportional relationship between QAW and A (advertising
budget). If the advertising budget will be increasing then the quantity demand of the apple watch will
increase due to the fact that advertising may help in reaching out to a larger target market.

6. USE MICROSOFT EXCEL FOR THIS QUESTION

Consider the scenario that the Apple team had contemplated with the following variable
values, prior to the launch. PAW = 349, PGearS = $380, PPebble = $220, PiPhone6 = $299, A=$15,500
a) Calculate the QAW, using the above values and the demand function in Figure 1.
QAW=-150000-2400PAW+1520PGearS+1200PPebble-1200PIphone6+44A
QAW= -150000 – 2400*349+ 1520*380+1200*220 – 1200*299+ 44*15500
QAW= 177200
1/1
b) Calculate QAW only changing PAW to values given in the table. This means keep P GearS ,PPebble ,
PiPhone6 and A fixed. 2/2

PAW 300 310 320 349 350 360 380 390 400
QAW 294800 270800 246800 177200 174800 150800 102800 78800 54800

c) Using the table above draw a demand curve (use MS Excel line chart option). Take QAW on Y-
axis and PAW on X-Axis. Like a typical demand curve, your curve should be downward sloping.

label axis 2.5/3

 Demand Curve
350000

300000

250000

200000

Demand Curve
150000

100000

50000

0
0 100 200 300 400 500

d) For each of the situations below, explain the effect on the demand curve i.e. is it a movement
along the curve, a rightward shift, or a leftward shift?

Calculate the change in QAW and label the variable as New_QAW. Use the same range for
PAW i.e $300$400 to draw an updated demand schedule. Graph a new demand curve (if there
is a shift). Keep all other variables, except the one mentioned, as fixed. For example, in (b)
only PGears changes to $400, rest of the values remain as given above i.e. PAW = 349,
PPebble= $220, PiPhone6 = $299, A=$15,500

I. Increase in price of AW from $349 to $400 values mossing 5/10

If the prices of the apple watch increases consequently, demand of the apple watch decrease
due to the negative relation between price and quantity. As shown in the graph below

. Point B

. Point A
 II. Increase in price of Gear S from $380 to $400
If Pgears prices increase then there would be a shift in demand curve towards right due to its
relation of being the substitute.

III. Decrease in price of Pebble from $220 to $150

If price of the Pebble smartwatch decreases the demand curve would shift towards the left side
due to its relation of being a substitute.

IV. Decrease in price of iPhone6 from $299 to $250.

If the price of the apple i-phone6 decreases then demand of the apple watches increase because
of their relation of complementarities resulting in a shift of demand curve towards the right.
 V. Increase in Advertising budget from $15,500 to $ 17,000.
An increase in the budget of advertising would cause the demand of the apple watch to increase
and the curve to shift towards the right.

VI. What is the marginal cost of producing one more Apple Watch? In other words, what is the
Opportunity Cost to the company of producing one more Apple Watch?
0/1
Marginal cost is change in price divided by change in quantity, using the values from above chart:

Marginal cost = (10/24000) = 0.0024.

The opportunity cost considering Apple would be the Iphone manufacturing or R&D cost that could have
been an option if apple was letting go of Apple Watch.

7. How will Apple’s entry in the smart watch industry impact the following? (3 points)

a) The other suppliers. Sketch a diagram to show the affect.

When apple will enter into the smartwatch market, it will impact the quantity demanded of its
substitutes (other suppliers) to decrease with a leftward shift in the demand curve.

not according to case study

D1substitutes
Cost of production is likely to fall and availability of
D2Substitutes components will increase so supply curve will shift
outward.
0/1

b) Healthcare Industry 1/1

It can boost the healthcare industry exponentially with its tracking functions of heart rate, sleep and
activity. More over imagine having a heart attack and no one is nearby but this tiny gadget on your wrist
alarmed the nearby hospital for aid.

c) Society in general.
1/1
Society in general would definitely benefit from Apple watch in ways like producers will have higher flow
of income which would have a ripple effect in jobs market, decreasing unemployment rate. It will create
a lot of opportunities for app developers to improve the lives of general public.

8. Do you own a smart watch? If not, find a friend or family member who does. Ask you/they
following questions. 2/3
Which smart watch brand do you/they have?

Huawei W1

What price did you/they buy it for?

PKR 25,000/-

What was your/their budget constraint when buying the watch?

There was no budget constraint as such I just liked the outlook of the watch. But yes I was constraining
myself to not go overboard and buy a watch worth more than 30,000 PKR.

What was yours/their opportunity cost in buying the watch? Explain in terms of what you/they gave
up to buy it.

To be honest Macbook, as I was saving the money to buy a Macbook but since I bought the smartwatch I
got distracted from saving the money for Macbook and gave up the idea all together.
Why did you/they choose the brand you/they did? What were the “substitutes” or “complements”
involved in the purchase decision?

For me it was simple the overall outlook of the smartwatch was enough to opt for it, given I was working
in a brokerage firm back then and the watch was sleeky and traditional looking enough to go with a suit
and tie. The substitutes were Apple Watch and Samsung Gear but then I was limiting myself to a budget
so I couldn’t opt for those two. Even in the aspects of “complements”, the watch works completely fine
with all the operating system so there was no extra cost linked to it in the form of a complement.

Would you/they want to buy an upgrade when it is released?

No.

If yes, what is your/their reservation price for it? If no, why?

Due to a personality change towards modesty, I no longer feel the need to go for such luxuries without
having the utmost need of their functionalities.

The watch can most likely be resold. How much can you/they resell it for? (If you/they don’t know
exactly, come up with a reasonable estimate, for example 60% of the original value)

Since it’s an old model I figure it would be around 10k – 15k PKR. There’s hardly any demand for it in the
market and so there goes the price of the product.

If you/they don’t sell it, what is the opportunity cost of keeping it? Rs 10k-15k. OC is the resale value
forgone if watch is kept
Well, I could sell it and add the amount into buying some other gadget or goods that I need. I believe the
opportunity cost would majorly be the time cost since most of the people rely on their salary to buy new
products if I’m 10-15k Rupees short on buying the new admired good I might have to wait another
month to buy it.

Submitted By:
Mir Murtaza Ali
23197