Principles of Economics - Essay Example

? Principles of Economics Assignment The purpose of this paper is to answer questions pertaining to macro-economic and micro-economic theory. Theformat that this paper will utilize is to first directly outline the question and then provide a critical response based on relevant literature. Q1. You own a local sub shop in a college town. You primarily serve two groups of people: local residents (both students and other local residents) and visitors to your town. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy. A1. Although, there may be a plethora of available price discrimination policies for a variety of different businesses, for a fast food eatery there are a number of simplistic strategies that could be employed to help increase revenues over a single price strategy. Firstly, the sub shop could advertise students to 'show their student card' for a predetermined discount. As for other residents fliers could be distributed to the houses in the community with a 'customer loyalty card attached'. These loyalty cards could also be presented for a predetermined discount. As visitors passing through the town would not have access to these types of identification they would be charged full price. According to Tutor2u (2011) this strategy would accomplish charging a higher price for an identical good (In this case food) for a reason that is not associated with an increase in costs. Q2. Suppose the cable TV industry is currently unregulated. However, due to complaints from consumers that the price of cable TV is too high, the legislature is considering placing a price ceiling on cable TV below the current equilibrium price. If the government does make this price ceiling law, diagram and explain the effects with supply and demand analysis. If the cable TV company is worried about disgruntling customers, suppose that the company may introduce a different type of programming that is cheaper for the company to provide yet is equally appealing to customers. Explain what would be the effects of this action. A2- In this example, if the government were to impose a price decrease from Price $(A) to Price $(B) this would naturally drive the demand from its Equilibrium level to a level of Q(B). However, the cable company may not want to provide all of this excess service to new customers (Owing to high costs associated with new cable lines etc) so it is likely that this government imposed decrease in price would be driven from Equilibrium to Q(A) resulting in a shortage of supply. Naturally, this action would enrage customers. What the company may choose to do is offer a price discrimination strategy wherein they could charge the new government imposed low price for a basic service cable service and continue a higher price strategy for a more premium service. Q3. Consider a perfectly competitive market. Analyze and explain in detail using graphical tools to show what you expect to happen to the number of firms and firm profitability in the short run and long run a) if demand for the product falls and b) if demand for the product rises. A3. As you can see from the above graph, if in a perfectly competitive market the quantity demanded for a product increases the demand curve will shift to the right and the price of a good will increase in the short term (Which would have a positive effect on the profitability of a firm). However, because the market is perfectly competitive more players would enter this market which would effectively drive the price down until its original equilibrium was once again attained. However the opposite could also hold true, insofar as if the demand for a good decreases the price of goods would also decrease (Which would have negative consequences for firms operating in this market). At this point several firms would no longer compete in this market and the quantity of goods supplied would decrease which would drive the price of goods back to its original position. Q4- Discuss why some long-run average cost curves are steeper on the downward side than others. Discuss fully. A4- According to Williams (2011) Long run cost curves are a graphical representation of the economies (Or in some cases dis-economies) of scale. From this perspective it is the case that if a curve is steeper on the downward side it would mean that the costs are more inelastic than alternatives. What this means is that changes in price does not mean an equal change in the demand for a good. Q5. If you purchased a new model of a digital camera right after it is released, you will likely pay more than if you purchase it six months after release. Explain why this is an example of price discrimination on the part of the firm. A5- According to Wolf (2007) this action represents a form of price diffusion. Typically with a new technologically advanced product, when the product first reaches the market a higher price is charged because people who 'simply can't wait to buy it' are willing to pay a great deal more. Several months later the price is lowered to help the product gain additional market share (Assuming there are no major technological defects). As more competitive products enter the market and newer/better technologies enter the market, the product may be sold for an even lower price. The reasoning as to why this represents a form of price discrimination is because it ensures that the most amount of money is charged for the product to best accommodate the market demand. Q6. Explain the rationale and the implications of the new guidelines used by the Department of Justice and the Federal Trade Commission for evaluating proposed mergers. A6- According to the Federal Trade Commission Website (2010) the new guidelines were implemented to simply accommodate legal and economic developmental changes since the last guidelines were implemented in 1992. Ultimately they were not intended to form some sort of major policy shift in the review process yet are intended to clarify the review process and assist the business that intend to form some sort of merger by providing clearer answers. The rationale as to why these organizations may want to institute these new guidelines may be the result of complications that arose out of incorrect/out-of-date/misleading information. Another possible reason may be because of elevated costs in the review process and by having clearer guidelines there may be a reduced chance of merger application error. References Federal Trade Commission (2010) Federal Trade Commision and U.S. Department of Justice Issue Revised Horizontal Merger Guidelines: 2010 Guidelines More Accurately Represent Agencies’ Merger Review Process. FTT Website. [online] Available at http://www.ftc.gov/opa/2010/08/hmg.shtm Accessed on July 23rd 2011. Tutor2u (2011) A2 Markets and Market System: Price Discrimination. [online] Available at http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.html Accessed on July 23rd 2011. Williams, M. (2011) Analysis of Monopoly (With No Price Discrimination) Cooleconomics [online] Available at http://getyourecon.com/prin-gen/prin-monopoly.pdf Accessed on July 23rd 2011. Wolf, J (2007) Making Sense of the Million-Dollar iPhone Lawsuit. Cnet News_Media Sphere [online] Available at http://news.cnet.com/8301-13508_3-9790142-19.html Accessed on July 23rd 2011. Read More