Why Apple makes money is a matter of basic economics

After Apple had announced that its iPod nano was a top-selling on Amazon.com, its stock climbed 3.3 percent on Nov. 26, 2005, hitting a 4-1/2 year closing high. Why do people believe that the selling of iPod has anything to do with the sustainable profit growth of the company?

The answer to this question lies in the understanding of some basic economic concepts -- complementary goods and substitute goods. The idea is as the follows. In life, some things just go together. For example, hot dogs and hot dog buns; hamburgers and ketchup; shoes and shoelaces. Typically it's more pleasing to purchase and consume these things along with the other member of the pair. An interesting thing about complementary goods is that changes in the price of one complement affect the other complement. For example, if hot dogs are on sale, not only people buy more hot dogs, they also buy more hot dog buns.

In the context of Apple, it's hot-selling iPod complements many of its own products. These include iTune Music Store (MP3 song downloads) and Apple computers (iMac, Powerbooks). Because iPods are cool, more and more people buy iPod. As an result, iPod owners are likely to purchase other Apple's product to complement their favorite gadgets -- purchase more MP3 songs from the iTune Music Store, buy more Apple computers to go with their iPods.

There is no magic in running a profitable business. Sometimes basic understanding of economics can help us to decipher the business model of a company.