Combined Impact of Rising Component Costs and Income Recovery on Smartphone Sales Revenue

Question

All brands of smartphones are available in different models. Global economic recovery and the rise in cost of key smartphone components are likely to have affected the sales of various models of smartphones in different ways.

(b) Assess the likely combined impact of the above changes on the revenue earned from the sale of different models of smartphones. [15]

Answer

Sales revenue is total revenue, $TR = P \times Q$. Two changes act at once: a rise in the cost of key components, which raises producers’ cost of production and shifts supply leftward (a price effect on $TR$, mediated by PED); and global income recovery, which shifts demand according to the model’s income elasticity (a quantity-and-price effect on $TR$, mediated by $YED$). I argue the combined impact on revenue is determinate only when the two channels push the same way, and otherwise indeterminate — so the answer depends squarely on the model’s $PED$ and $YED$, which differ across the smartphone range.

Case 1 — outdated low-end models: revenue falls unambiguously. Consider a model with many substitutes (price elastic, $|PED| > 1$) that is also outdated and so inferior ($YED < 0$). The supply fall raises price; with elastic demand, quantity falls more than proportionately, so $TR$ falls. Income recovery, with $YED < 0$, reduces demand, lowering both price and quantity, so $TR$ falls again. Both channels lower revenue, so the combined impact is an unambiguous fall.

Case 2 — basic necessity models: revenue rises unambiguously. Now a model regarded as a necessity (price inelastic, $0 < |PED| < 1$) that is a normal necessity good ($0 < YED < 1$). The supply fall raises price; with inelastic demand, quantity falls less than proportionately, so $TR$ rises. Income recovery raises demand, lifting both price and quantity, so $TR$ rises again. Both channels raise revenue, so the combined impact is an unambiguous rise.

Case 3 — premium models: revenue indeterminate. A premium model may be price elastic for most buyers ($|PED| > 1$) yet a luxury good ($YED > 1$). The supply fall against elastic demand lowers $TR$, but the income recovery against $YED > 1$ raises $TR$. The two channels conflict, so the combined impact is indeterminate, depending on the relative magnitudes of the shifts and the elasticities.

Evaluation and judgement. The combined impact on revenue is not a single answer but a conditional one, and the condition is whether the price (PED) channel and the income (YED) channel agree. A definite fall occurs where demand is price elastic and the model inferior; a definite rise where demand is price inelastic and the model a normal necessity. Where they disagree — the common case of a premium model that is both price elastic and a luxury — the net effect turns on which dominates: the negative cost-push effect (supply fall against elastic demand) or the positive income effect ($YED > 1$). The realistic verdict is context-sensitive: for most consumers a premium model takes a large income share and is price elastic, so the cost rise tends to cut its revenue, but for the very affluent it is price inelastic and strongly income elastic, so revenue is more likely to rise. A producer should therefore expect revenue from cheap, dated models to fall, revenue from basic necessity models to rise, and revenue from premium models to depend on the income gain outweighing the cost-driven price effect — an assessment that cannot be settled without the elasticity magnitudes for each model.