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Microeconomics of Product Markets

  • Srishti Mittal

Module #2: Microeconomics of Product Markets

Exercises:

1.

A recent review has found that a rise in the price tag on beer would reduce the amount of cannabis consumed. Is the cross-elasticity of demand between the two products positive or negative? Are these products substitutes or matches? What might be the logic behind this romance? Illustrate your answers using graphs.

Ans. In economics, the mix elasticity of demand or cross-price elasticity of demand steps the responsiveness of the demand for a good to a change in the price tag on another good. It really is assessed as the percentage change in demand for the first good that occurs in response to a percentage change in cost of the second good. For example, if, in response to a 10% upsurge in the price tag on gas, the demand of new cars that are gasoline inefficient decreased by 20%, the cross elasticity of demand would be: . A negative combination elasticity denotes two products that are suits, while a good cross elasticity denotes two substitute products. Both of these key interactions may not in favor of one's intuition, but the reason behind them is fairly simple: assume products A and B are matches, meaning that an increase in the demand for just a is caused by an increase in the quantity demanded for B. Therefore, if the price tag on product B decreases, then your demand curve for product A shifts to the right, increasing A's demand, resulting in a negative value for the cross elasticity of demand. The precise opposite reasoning keeps for substitutes.

2.

In the previous decade or so there's been a dramatic development of small retail convenience stores (such as 7-11s, Kwik shops, and Gas'N Shops), although their prices are usually higher than those in large supermarkets (such as Walmart and Aim for). Explain the success of the convenience stores in monetary terms.

Ans. As People in america have grown to be more time-constrained, convenience stores (C-stores) have become a beacon in the retail sector. Part grocery store, part food-service store and frequently part gas stop, C-stores - whether local mini-marts or interstate drive-through - offer something for everybody. And consumers are taking notice. A growing number are turning to C-stores because of their acquisitions, growing the C-store business to a projected $52. 8 billion in 20101. Moreover, the industry appears to be poised for extended growth. In the next five years, C-store income in the United States are projected to increase by the average twelve-monthly rate of 3. 9 percent and reach $63. 9 billion by 20152. But the C-store business is complex, fast paced and rife with challenges such as moving consumer choices; intensifying competition from mass vendors; volatile gas prices; multiple legal and regulatory compliance responsibilities; around-the-clock staffing and businesses; and growing loan consolidation of stores and chains. Consumer demands and tastes change frequently, contacting for development across an extensive selection of products and services. New products and functional changes can be costly to put into action and - if services, operations or systems are put in place poorly - can undermine the very profitability and growth they are designed to deliver. C-stores must also be able to maintain strong communication between employees at the point of sales (POS) and top management workers, who must disseminate insights and put into action guidelines throughout the network of stores. It's a tall order, rather than all C-stores fare equally well when confronted with these challenges. In the following sections, we draw upon our experience with C-stores to focus on lots of trends affecting the C-store industry as well as ideas for management staff to consider as they evaluate what's right for his or her business. We touch on both big-picture trends, such as M&A activities, and fads in specialized areas that gets overlooked as executives grapple with proper issues. 1 IBIS World industry article, May 8, 2010. (This statistic excludes gasoline stations with convenience stores. ) 2 IBIS World industry statement, May 8, 2010. (This statistic excludes gasoline stations with convenience stores. ) Mapping the road to success Since its inception in 1927, the C-store industry has been successful predicated on its chameleon-like ability to adapt to changing customer tastes and an innovating business environment. Now more than ever, C-store executives notice that both survival and prosperity rely upon this ability. The challenge is to execute change quickly and constantly across good sized quantities - in many cases hundreds - of individual stores. This is no easy job, considering that each store has a unique marketplace and that, particularly with franchises, each store is a company in its right. Executing change efficiently requires strong self-control and close attention to detail. In addition, it requires a roadmap that gives directions for obtaining regularity across all stores while catering to consumer personal preferences specific to local marketplaces. This roadmap is a formalized set of guidelines and guidelines delineating how to perform a C-store at the amount of the average person store device. Effectively a how-to guide, the roadmap assists as a means of standardizing procedures for a business composed of multiple geographically dispersed products that deliver fundamentally the same service or product countrywide - while get together changing customer expectations and dealing with issues within local marketplaces. An effective roadmap can help the business achieve functional efficiencies and reliability of service, from store formats to merchandising to regulatory conformity and training of employees. However the roadmap should be adaptable enough to accommodate customization at the local level. A one-size-fits-all procedure can result in underperformance if specific stores cannot modify their product mixture, marketing programs or job strategies to represent the targets and idiosyncrasies of these local markets. An operational roadmap can help C-store businesses:

  • delineate duties across headquarters, central functions and individual stores;
  • create and drive operational efficiency;
  • benchmark and execute best practices across the chain;
  • evaluate and react to operational dangers at the store level;
  • perform homework for acquisitions of new stores;
  • quickly integrate newly built or bought stores;
  • comply with regulations; and
  • execute strategic and functional changes quickly and constantly across the corporation.

3.

Use the concept of economies and diseconomies of level to describe the shape of an firm's long-run ATC curve. What's the idea of minimum efficient size? What bearing can the condition of the long-run ATC curve have on the framework of an industry?

  • Ans. Economies of range will be the cost advantages that a business can exploit by widening the size of production
  • The impact is to reduce the long term average (unit) costs of production.
  • These lower costs are an improvement in productive efficiency and may benefit consumers in the form of lower prices. But they provide a business a competitive edge too!

Technical economies of range:

  1. Large-scale businesses are able to purchase expensive and specialist capital machinery. For instance, a supermarket chain such as Tesco or Sainsbury can invest in technology that enhances stock control. It might not, however, be viable or cost-efficient for a tiny place shop to buy this technology.
  2. Specialization of the workforce: Bigger businesses split complex production functions into separate duties to boost output. The division of labor in mass creation of motor vehicles and in making electronic products is an example.
  3. The law of increased sizes. This is linked to the cubic rules where doubling the elevation and width of your tanker or building brings about a far more than proportionate upsurge in the cubic capacity - this can be an important scale current economic climate in circulation and transport business and also in travel and leisure industries.

Marketing economies of scale and monopsony electric power: A large firm can spread its advertising and marketing budget over a large outcome and it can buy its inputs in large at negotiated discounted prices if it has monopsony (buying) ability on the market. An example would be the ability of the electricity generators to negotiate lower prices when negotiating coal and gas supply contracts. The big food retailers have monopsony electric power when purchasing supplies from farmers.

Managerial economies of size: This is a form of department of labor. Large-scale manufacturers employ specialists to supervise production systems and oversee recruiting.

Financial economies of size: Larger businesses are usually ranked by the financial marketplaces to become more 'credit valuable' and also have access to credit facilities, with beneficial rates of borrowing. On the other hand, smaller businesses often face higher rates of interest on overdrafts and lending options. Businesses quoted on the currency markets can normally raise fresh money (i. e. extra financial capital) more cheaply through the issue of equities. They are also more likely to pay a lesser rate of interest on new company bonds granted through the capital markets.

4.

Learning to utilize software programs does take time. So once consumers have learned to use a particular program, it is better to sell them software updates than to persuade them to change to new software. What implications does indeed this have for expected rates of return on R&D spending for software from producing updates versus from producing imitative products?

Ans. Big technology companies are spending about $9. 70 on research and development for every $100 they ingest, with the spending being especially heavy in areas like virtualization and Internet-delivered software.

In total, the industry's top R&D spenders poured almost $51 billion into product development in 2007, according to a review by CIOZone. However the spending was focused at the top, with Microsoft, IBM and Intel accounting for 38% of all research outlays.

Microsoft's spending topped $7 billion as the business poured hundreds of millions of new development us dollars into its money-losing online services business. In addition, it broadened its R&D operation in some overseas countries, including Israel, where recently hired designers will give attention to marketing communications software.

Microsoft put in 12. 8% of its 2007 revenue on R&D, well above the common of the firms on our list but not surprising given the countless product areas where it competes. Besides its key business of software, Microsoft is wanting to boost its position in digital music players and Search on the internet. It trails the leaders in those market segments, Apple and Google, by vast margins.

Professional Development:

1.

How can time be incorporated into the theory of consumer action? Explain the next comment: "Want to make millions of dollars? Devise something that saves People in the usa lots of the time"

Ans. The utilization and expenditure of energy is inextricably linked to consumer behavior. As Jacoby et. al (1977) explain "Acquisition and use of both products and information regarding products aren't cross-sectional events of short and unvarying period. " It has even been proposed that time may be the most crucial adjustable in consumer behavior (Nicosia and Mayer 1976). Our point out of knowledge, however, finds us caught in an interesting anomaly. On the main one side, enough time dimensions of consumer action is viewed as just beginning to emerge as a significant variable of research, as three articles researched here indicate. On the other side, however, time has been implicitly and explicitly included into consumer behavior theory and marketing strategies for quite some time. This content first reviews the history of the incorporation of the time into consumer action theory and marketing strategies and then reviews the three articles worried about "Perception of your time and Consumer Behavior".

2.

Many apartment-complex owners are setting up water meters for every apartment and billing the occupants in line with the amount of normal water they use. This is in contrast to the former method of experiencing a central meter for the entire intricate and dividing in the water expense within the rent. Where specific meters have been around in stalled, water consumption has declined 10 to 40 percent. Explain that drop, discussing price and marginal energy.

Ans. When the water was on a central meter there have been, what are called "free riders" in economics (individuals who "free ride" from a general public or collective gain), these folks use greater amounts of water because their profit (utility) is increased because the expenses are shared and sent out among those that use less normal water (folks have the incentive never to limit water use but to increase). Once the water became individually metered, people could no longer have the extra energy because they now pay for every little bit that they use. Which means price increased for heavy water users and energy went down. In order to maintain the budget curve they would have to reduce water use (because of the price increase), which means that they do not obtain the same marginal electricity but it decreases or quite simply the marginal energy curve flattens out. That's the reason usage fell.

Reference

McConnell, Brue. (2008). Microeconomics: Rules, Problems, and Plans, 17th Ed. , New York: McGraw-Hill.

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