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On Valentine's Day, the price of roses increases by more than the price of greeting cards. Why? (Hint: Consider what makes roses and cards different and how that difference might affect supply's responsiveness to price.)
Answer
Price of any commodity depends on demand and supply. Also, perishability affects the supply and hence equilibrium price. Roses are perishable and can’t be stocked for future demand while greeting cards are not perishable and can be produced and stocked in advance to meet the future demand. On valentine day, supply and demand of roses has wide gap and hence equilibrium price goes up. However, supply-demand gap of greeting card is not as wide as rose case which causes price hike in greeting card much lower than price hike in roses on valentine day.
Price of any commodity depends on demand and supply. Also, perishability affects the supply and hence equilibrium price. Roses are perishable and can’t be stocked for future demand while greeting cards are not perishable and can be produced and stocked in advance to meet the future demand. On valentine day, supply and demand of roses has wide gap and hence equilibrium price goes up. However, supply-demand gap of greeting card is not as wide as rose case which causes price hike in greeting card much lower than price hike in roses on valentine day.
Relative to managers in more monopolistic industries, are managers in more competitive industries more likely to spend their time on reducing costs or on pricing strategies?
Answer
In monopolistic industry, firm have total control on supply side and managers have power to drive the pricing strategy in such situation. Whereas in competitive industry, market forces decide the price of product or commodity and managers have very less power to drive the pricing strategy of industry as a whole. In competitive industry manages have more power to control the cost to remain competitive. Monopolistic firms are common in industry where differentiation is possible. Example includes restaurants, hotels, and saloons. So, in such industry managers can spend more time on pricing strategy based on the product differentiation while in commodity industry (minerals and mining) managers have to think upon on reducing cost.
In monopolistic industry, firm have total control on supply side and managers have power to drive the pricing strategy in such situation. Whereas in competitive industry, market forces decide the price of product or commodity and managers have very less power to drive the pricing strategy of industry as a whole. In competitive industry manages have more power to control the cost to remain competitive. Monopolistic firms are common in industry where differentiation is possible. Example includes restaurants, hotels, and saloons. So, in such industry managers can spend more time on pricing strategy based on the product differentiation while in commodity industry (minerals and mining) managers have to think upon on reducing cost.
Describe an important difference in the way an economist and a businessperson might view a monopoly.
Answer
In monopoly, monopolistic firm has total control on supply side of market and hence total control on pricing of product. In absence of government intervention firm is free to set any price it wants and usually firm set price very high. In such situation businessmen look at monopolistic market as opportunity for higher profit. As single firm dominates the market price at higher rate some consumers shift to other product and some consumers stop consuming product itself, it creates deadweight loss. Economist looks at monopolistic situation as deadweight loss or inefficient market. Businessmen thinks of monopoly for maximizing profit and economist thinks of monopoly as deadweight loss or inefficient market.
In monopoly, monopolistic firm has total control on supply side of market and hence total control on pricing of product. In absence of government intervention firm is free to set any price it wants and usually firm set price very high. In such situation businessmen look at monopolistic market as opportunity for higher profit. As single firm dominates the market price at higher rate some consumers shift to other product and some consumers stop consuming product itself, it creates deadweight loss. Economist looks at monopolistic situation as deadweight loss or inefficient market. Businessmen thinks of monopoly for maximizing profit and economist thinks of monopoly as deadweight loss or inefficient market.
To increase a company's performance, a manager suggests that the company needs to increase the value of its product to customers. Describe three ways in which this advice might be incorrect (Hint: Think about what else might or might not change that affects profit.)
Answer
Increasing the value of product or customer generally helps to improve the revenue and hence profitability of company. But there are few instances where increasing the value may not work:
Monopolistic market: When firms has monopoly in industry increasing the value of product or customer will not affect the demand. Demand is usually more than supply in monopolistic situation. So, increasing value of product will not affect the performance of company.
Commodity: When firm manufacture commodity or manufacture product which has less option for differentiation increasing the value of customer or product doesn’t not affect the demand. In commodity market demand is purely affected by the price not by the value of product so performance is less affected by value of product or customers.
Substitutes: When product is obsolete or technological advancement has replaced the product with substitute increasing value will not affect the performance. For example, cell phones replaced pagers.
Increasing the value of product or customer generally helps to improve the revenue and hence profitability of company. But there are few instances where increasing the value may not work:
Monopolistic market: When firms has monopoly in industry increasing the value of product or customer will not affect the demand. Demand is usually more than supply in monopolistic situation. So, increasing value of product will not affect the performance of company.
Commodity: When firm manufacture commodity or manufacture product which has less option for differentiation increasing the value of customer or product doesn’t not affect the demand. In commodity market demand is purely affected by the price not by the value of product so performance is less affected by value of product or customers.
Substitutes: When product is obsolete or technological advancement has replaced the product with substitute increasing value will not affect the performance. For example, cell phones replaced pagers.
Examine the U.S. passenger airline industry using the Five Forces. Is this an attractive industry? Why or why not?
Answer
Yes, U.S. passenger airline industry is attractive considering below five forces.
Threat of new entrants: U.S. has privately owned passenger airlines. 80% of passengers travel in the U.S market use Delta airlines, American airlines, United airlines and Southwest airlines. Other 6 airlines have only 20% market share. Airline also requires very huge capital investment which makes entry of new player very difficult.
Threat of substitute: No other mode of transport has ability to match the travelling time with airlines. So threat of substitute is negligible.
Bargaining power of buyers: Government has no intervention on pricing policy and airlines may decide price on its own.
Bargaining power of suppliers: Fuel price is most important for operating expense which is decided by market forces.
Industry rivalry: As passenger travelling in U.S. and passengers are travelling frequent as well, market is less competitive due to growing size.
Yes, U.S. passenger airline industry is attractive considering below five forces.
Threat of new entrants: U.S. has privately owned passenger airlines. 80% of passengers travel in the U.S market use Delta airlines, American airlines, United airlines and Southwest airlines. Other 6 airlines have only 20% market share. Airline also requires very huge capital investment which makes entry of new player very difficult.
Threat of substitute: No other mode of transport has ability to match the travelling time with airlines. So threat of substitute is negligible.
Bargaining power of buyers: Government has no intervention on pricing policy and airlines may decide price on its own.
Bargaining power of suppliers: Fuel price is most important for operating expense which is decided by market forces.
Industry rivalry: As passenger travelling in U.S. and passengers are travelling frequent as well, market is less competitive due to growing size.
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