It is interesting to think of the law of diminishing margnial utility and how it relates to almost every decision made. Whether you are going to a drive thru to get some food or going to the store to get a new pair of sunglasses. There are billions of examples, but it is interesting to see that it really does apply to almost any good or service that must be purchased. For instance, it used to be nice to go to Taco Bell and get 3 of those grilled stuffed burritos. After a while I soon realized that after the first one (sometimes after the second) I just was not in the mood for the third. I would look at it like why did I buy you? I could have easily spent that money on something different that would have satisfied me just as much as the first or second burrito. Now I am stuck with a third non satisfying burrito that is just going to end up giving me a food coma. I am going to start asking the burrito what it can do for me instead of letting it get the best of my wallet.
I hope Taco Bell lowers the price of these burritos because it will not be worth buying these otherwise. Then I would buy 3 and save the third for later.
Sunday, July 17, 2011
Sunday, July 10, 2011
Monopolistic Competition
According to what we have learned in class, Monopolistic Competition has a large number of firms, there are no barriers to entry, and there is product differentiation. Quality Control measures ensure product reliability and effectiveness. The Four Firm Concentration Ratio is the total percentage of revenue collected by the four biggest firms within a certain industry. So 100% would be a monopoly and anything under 40% would be monopolistic competition. The higher the percentage means there is less competition. Monopolistic Competitive companies are able to set their own price which is good because this allows them to be the expert in the field of business in which they are pursuing. The efficient use of pricing and marketing will allow for profit maximization as long as their Average Transaction Costs are above the demand for their product. Average Transaction Costs must intersect with Marginal Costs (Cost to make one more product) above this Demand curve. Setting the price is tricky and seems that it must be done cautiously and might require trail by error. This method of pricing is usually used to drive other competitors out of business but is not recommended for normal operations. There is a signifigant amount of Deadweight Loss using this diagram of Profit Maximizing. Profit Maximizing is always sought out but could maximizing profit also be a negative aspect of running a business? If a business operated at just under full maximization could it sell more product because of the lower price of the good?
Sunday, July 3, 2011
Consumer Surplus and Perfectly Competitive Markets
It is always nice to save money when purchasing certain products. Although sometimes it seems this can be quite the opposite.
Consumer Surplus is the difference between the maximum price consumers are willing to pay for an additional unit of that certain product and the market price at which it is set. The Consumer Surplus is found above the market price but below the demand curve. The higher the market price is, the less consumer surplus will result.
In a Perfectly Competitive Market, producers want to get more producer surplus and diminish consumer surplus but finding the equalibrium can be challenging. By raising their market price they will eliminate the consumer surplus which can also create a Deadweight Loss. The Deadweight Loss happens when marginal costs exceed marginal revenue and marginal benefit.
Different types of pricing strategies can enable companies to get the most out of their products in the market. Price Discrimination is one of the best ways for a company to find this equalibrium price by using information obtained from research to target certain markets. These prices are not reflected by the costs differences. Is consumer surplus maybe a good thing for companies to hold onto? Without consumer surplus, consumers will try and find other means of buying that same product, and loss of consumers could hurt profits. Only in monopolistic companies would this not be detrimental too because there would be no possible equal substitutes.
Consumer Surplus is the difference between the maximum price consumers are willing to pay for an additional unit of that certain product and the market price at which it is set. The Consumer Surplus is found above the market price but below the demand curve. The higher the market price is, the less consumer surplus will result.
In a Perfectly Competitive Market, producers want to get more producer surplus and diminish consumer surplus but finding the equalibrium can be challenging. By raising their market price they will eliminate the consumer surplus which can also create a Deadweight Loss. The Deadweight Loss happens when marginal costs exceed marginal revenue and marginal benefit.
Different types of pricing strategies can enable companies to get the most out of their products in the market. Price Discrimination is one of the best ways for a company to find this equalibrium price by using information obtained from research to target certain markets. These prices are not reflected by the costs differences. Is consumer surplus maybe a good thing for companies to hold onto? Without consumer surplus, consumers will try and find other means of buying that same product, and loss of consumers could hurt profits. Only in monopolistic companies would this not be detrimental too because there would be no possible equal substitutes.
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