Week 2 - Bus performance, Markets & Advertising Flashcards
What is “Characteristics Theory”
Characteristics Theory
Consumers derive utility from the characteristics of a product or service
What are the assumptions of characteristics theory?
Assumptions:
- All products possess various characteristics
- Brands possess the characteristics in different proportions
- Characteristics are measurable
- Characteristics, Price and income determine choice
How does changing the mix of characteristics change the product’s utility curve?
It changes the slope of the graph
What is an efficiency frontier?
Choosing a combination of two goods to achieve an efficient consumption of utility
How is the efficient consumption of a characteristic calculated?
Ye = Y1 + Y2
Ye = efficient outcome
Y1 = Characteristic proportion in product1
Y2 = Characteristic proportion in product2
What is an indifferent curve?
A combination of products that gives the same amount of utility
What are the limitations of characteristics analysis?
- It is difficult to measure characteristics in a clear way
- Most products have more than two characteristics
- Indifference curves have a practical use but cannot be produced for a single-person
- Consumer tastes change and are hard to predict
What are the assumptions of perfect competition?
- Firms are price takers and cannot influence prices
- Complete free entry to a market
- All products are the same
- Knowledge is perfect for consumers and producers
What is the profit outcomes in perfectly competitive markets?
Firms can only make economic profit in the short-run
Firms only make normal profit in the long-run
How is price and Profit maximised calculated in perfect competition?
P = MR = AR
P = price
MR = marginal revenue
AR = average revenue
Profit: MR=MC
What are the assumptions of a monopoly market?
Assumptions:
- One seller
- High barriers of entry
- Can make long-term profit
