all combined Flashcards
Define Economics
Economics is the study of scarcity and trade-offs, which have implications for:
the use of resources,
production of goods and services,
growth of production and welfare over time, and
a great variety of other complex issues of vital concern to
society.
What economists aim for
Economists aim to explain and predict the behaviors of
consumers and firms in response to changes in economic
conditions.
Define Microeconomics
A branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise
Define economic units and their scarcity and tradeoffs
Consumers – possess limited incomes, which can be spent on a wide variety of goods and services or saved for the future.
Workers – face constraints and make trade-offs.
Firms – limited production options, capacity and resources.
A rational individual (or entity) has preferences that are
transitive and complete
The framework that much of an Economics field uses is built on two principles;
The optimization principle: People try to choose the best
patterns of consumption that they can afford (more is better than less as long as it fit the budget).
1. Ranking of the preferences and choosing the best option
2. Building an economic model and solving the rezulting
optimization problem
The equilibrium principle: Prices adjust until the amount
that people demand of something is equal to the amount that is supplied (economic agents’ actions must be consistent with each other)
Define comparative statics
The study of how the equilibrium price and quantity change as a response to the changes in underlying conditions
Define Cournot Duopoly and its traits
describes an industry in which firms compete on the
amount of output they can produce.
Firms decide the quantity of the product to produce
independently of each other and at the same time.
All firms produce a homogeneous product.
Firms do not cooperate (NO COLLUSION).
Firms have market power; that is, each firm’s decision affects the good’s price.
The number of firms is fixed.
Firms are rational; they maximize profits.
The characteristics of perfectly competitive markets:
Price taking
Product homogeneity
Free entry
Competitive v. Monopolized Markets
Competitive market → several firms sell an identical product.
No firm or consumer has a market power to significantly change the market-clearing price.
An attempt by a firm to charge more leads consumers to abandon the high-priced firm in favor of a competitor.
Monopolized market: there is only one firm selling a given product.
If a monopolist raises the price of the product, it loses some, but NOT all consumers
How Firms Do Exploit their Market Power?
1 The firm is free to use more complex pricing and
marketing strategies than a firm in a competitive
industry.
2 The firm can try to differentiate its product from the
products sold by its competitors to enhance its market
power even further.
3 The firm can use dynamic pricing (surge pricing), where
firms adjust the price of the product based on the
demand. Mostly used for firms selling fixed inventory
by a set deadline, such as seat in trains and airlines,
bus fares, tickets for entertainment, food delivery and
Uber/Bolt.
How Monopolies discriminate price
operates at inefficient level of output so that people
are willing to pay more than under ideal market conditions, where price equals the costs. Extra output would force down the price, otherwise it would not be
able to get rid of all of its output.
Three types of price discrimination
Selling (1) different units of output at
different prices that may vary from person to person, (2) different units of output for different prices, but every individual who buys the same amount of the good pays the same price (bulk discount), and (3) the product to different people for different prices, but every unit sold to a given person sells for the same prices (senior citizen’s/student/military discounts).
First-Degree Price Discrimination
Each unit of the good is sold to the individual who values it most highly, at the maximum price that this individual is willing to pay for it (reservation price).
The Problem with First-Degree Price Discrimination
the high-willingness-to-pay person can pretend to be the
low-willingness-to-pay person.
Second-Degree Price Discrimination
the price per unit of output is not constant but depends on how much you buy. That is, to get around the problem of first-degree price discrimination a firm can offer multiple different price-quantity packages in the market.
Third-Degree Price Discrimination
Monopolist sells to different people at different prices, but every unit of the good sold to a given group is sold at the same price.
For this to work, the market with the higher price must have the lower elasticity of demand.
Product Differentiation
Product differentiation is a process that firm takes on to distinguish a product or service from others in the market.
This tactic aims to help businesses develop a competitive advantage and define compelling, unique selling propositions (USPs) that set their product apart from competitors.
Organizations with multiple products in their portfolio may use differentiation to separate their various products from one another and prevent cannibalization.
Types of Product Differentiation
Horizontal Differentiation → differentiation that is not associated with the product’s quality or price point. Instead, these products offer the same thing at the same price point. It boils down to the customer’s personal preference.
Examples of Horizontal Differentiation: Pepsi vs. Coca-Cola, bottled water brands, types of dish soap.
Vertical Differentiation → In contrast to horizontal differentiation, vertically differentiated products are extremely dependent on price. With vertically differentiated products, the price points and marks of
quality are different.
Examples of Vertical Differentiation: Branded products vs. generics, A basic black shirt from H&M vs. a basic black shirt from a top designer, the vehicle makes
Pricing Strategies
Static Pricing: Fixed price all day.
Variable Pricing: Daily price changes without intraday variation.
Dynamic Pricing: Prices fluctuate daily and may increase through multiple levels during the day, depending on the
e-commerce platform’s technology. Price adjustments might be automatic or manual.
Dynamic pricing vs price discrimination
Firms that adopt dynamic pricing (surge pricing) adjust prices based on market conditions, demand, and other factors, while price discrimination tailors prices to individual customer characteristics and willingness to pay
