Modules 1-3 Flashcards
What is Willingness to Pay (WTP)?
Willingness to pay is the maximum amount of money a customer is willing to pay for a product or service.
How does WTP differ from price?
WTP is not the same as price; a product may have a price of $0, but consumers may still be willing to pay a lot for it.
What happens if the price of a product is higher than a consumer’s WTP?
The consumer will not purchase the product.
What factors influence a consumer’s WTP?
Factors include observable elements like income, gender, and age, as well as non-observable elements like intrinsic preferences and substitutes.
What is a demand curve?
A demand curve summarizes a consumer’s willingness to pay for various quantities of a product.
How is a demand curve typically graphed?
Price is represented on the y-axis, and quantity demanded is on the x-axis.
Why are demand curves useful?
They allow easy visualization of how a firm’s revenues correspond to different prices.
What shape is an individual’s demand curve and why?
It is typically downward sloping due to diminishing marginal returns.
What does the market demand curve represent?
It reports the aggregate quantity demanded at any given price.
What causes shifts in the demand curve?
Changes in consumer willingness to pay result in shifts of the demand curve.
What is the difference between slopes and shifts in the demand curve?
Changes in price correspond to movements along the demand curve, while non-price factors that affect WTP correspond to shifts.
What does the slope of a market demand curve measure?
The slope measures how responsive buyers are to changes in price.
What characterizes an elastic demand curve?
An elastic demand curve is flat or near-flat, where a small dip in price leads to a large surge in quantity demanded.
What characterizes an inelastic demand curve?
An inelastic demand curve is steep or vertical, where changes in price have little impact on quantity demanded.
When is demand typically more elastic?
Demand is typically more elastic if a product is a luxury rather than a necessity, or if there are many substitutes available.
How is the price elasticity of demand calculated?
It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
What is a key advantage of using elasticity over slope measures?
Elasticity is a unit-less measure, allowing for easier comparison of demand elasticities for different products.
How does elasticity vary on a demand curve?
Elasticity is different at each point on a demand curve with constant slope, but the curve can be called ‘elastic’ or ‘inelastic’ based on its overall slope.
What is income elasticity of demand?
Income elasticity of demand measures how sensitive quantity demanded is to a change in consumers’ income.
What are surveys and focus groups used for?
They are used by firms to directly ask consumers about their preferences.
What is a challenge of surveys and focus groups?
Challenges include designing them to encourage truthful responses and selecting the right target sample of consumers.
What is the advantage of auctions in assessing consumer WTP?
Auctions effectively elicit a consumer’s true WTP by tying preference revelation to the probability of obtaining the good.
What is an open outcry auction?
In an open outcry auction, buyers submit increasing bids, and the highest bidder wins, typically paying just above the second highest bid.
What is a sealed second-price auction?
In a sealed second-price auction, buyers submit sealed bids, the highest bidder wins, and pays the second highest bid.
What is a sealed first-price auction?
In a sealed first-price auction, buyers submit sealed bids, and the highest bidder wins and pays what they bid.
What does the Revenue Equivalence Result state?
Under certain general conditions, each type of auction should result in approximately the same revenue for the seller, which is approximately equal to the 2nd highest bidder’s WTP.
When might fixed prices be preferred over auctions?
Fixed prices may be preferred in certain settings due to the uncertainty and delay that auctions can create for consumers.
What is the winner’s curse?
The winner’s curse occurs when the winner of an auction overpays for a product, paying more than its true value, often because they overestimated the product’s worth.
What is revealed preference?
Revealed preference is the principle that firms infer WTP from consumer actions rather than from what they say.
What is a challenge of using data on past consumer choices?
A challenge is ensuring that missing variables do not confound the correct interpretation of the data.
What is an advantage of running experiments to determine WTP?
Experiments allow firms to avoid the problem of missing variables by randomizing treatment and control groups.
What is conjoint analysis?
Conjoint analysis is a survey design that determines consumers’ preferences for individual product features by asking them to rank different bundles of features.
How do firms use conjoint analysis?
Firms use the numerical values assigned to each feature from conjoint analysis to predict consumer reactions and decide on product features to offer.
What are some strategies firms can use to assess demand?
Firms can influence demand through advertising, which can shift the demand curve outward.
What are the commonly observed forms of advertising?
Common forms include advertising a specific firm’s product, advertising an industry, or negative advertising against a competitor.
How does advertising a specific firm’s product affect demand?
It shifts the demand curve facing the firm to the right.
When is advertising an industry beneficial?
It is more beneficial when a firm has few important competitors, shifting the entire industry’s demand curve to the right.
What effect does negative advertising have?
Negative advertising shifts the demand curve for the competitor’s product to the left.
What effect does advertising a firm’s own product have on the demand curve?
Advertising its own product shifts the demand curve facing a firm to the right.
When is advertising an industry more beneficial for a firm?
Advertising an industry is more beneficial when a firm has few important competitors.
What happens to the demand curve for the entire industry when advertising is effective?
It shifts the demand curve for the entire industry to the right.
What is the effect of running negative advertisements about a competitor?
It shifts the demand curve for the competitor’s product to the left and, if the competitor’s product is a substitute, shifts the demand curve for the firm’s product to the right.
What are substitutes?
Substitutes are products that can replace each other.
What happens to the demand curve for a firm’s product as the availability of substitutes increases?
The demand curve for a firm’s product shifts left.
What are complements?
Complements are products that consumers wish to consume together.
What happens to the demand curve for a firm’s product as the availability of complements increases?
The demand curve for a firm’s product shifts right.
How can firms increase demand for their products?
By making substitutes less available or more expensive, or by making complements more available or cheaper.
What are network effects?
Network effects occur if a product is more valuable to its users, the more users it has.
How do network effects influence an individual’s demand curve?
An individual’s demand curve shifts right as other users purchase the product.
What is willingness to sell (WTS)?
Willingness to sell is the minimum amount of money that a supplier is willing to accept in return for the input it sells.
How is WTS viewed from the standpoint of a firm?
WTS is its suppliers’ willingness to sell the inputs it needs.
What is the value created by a firm?
The value created by a firm is the difference between the WTP of its consumers and the WTS of its suppliers.
What is profit in terms of consumer and supplier prices?
Profit is the difference between the price charged to consumers and the price paid to suppliers.
What is consumer surplus?
The difference between WTP and price is the value captured by the consumer.
What is supplier surplus?
The difference between the firm’s cost and WTS of its suppliers is the value captured by the supplier.
Why are costs important in business analysis?
Costs are important in analyzing whether a company’s business is in good shape and in deciding how much a company should produce.
What two aspects of costs did Module 3 explore?
The structure of a firm’s costs and the level of a firm’s costs relative to its competitors.
