In my opinion price discrimination in the form of senior citizen discount or children discounts is a fair pricing policy because with senior citizens most live on a fixed income with their pension or social security so it is a nice thing for companies to give them a discount. Senior citizens might be more enticed to spend their money with that company that gives a senior discount. Like with movie theaters, at prices movie tickets are now a days seniors would rather rent a movie from the library or Redbox but if you give them a senior discount they would be more enticed to go see a new movie at the theater instead of waiting until it came out on DVD for them to rent and the company would attract that market segment that they weren’t previously attracting. Price discrimination can lead to increased profits. Going back to the previous question, price discrimination can lead to increased profits since that company is gaining a segment of the market they weren’t initially reaching. Pollution is a negative externality because if a company chooses to dump polluted materials into a nearby river, the parties downstream would enjoy using the river for recreational or productive activities will bear the external cost of the pollution through reduced enjoyment and productivity of the river so pollution is considered a negative externality. Governments can regulate pollution to the optimal levels by charging companies with a higher level of pollution with a higher pollution emission tax until the company improves their pollution level. The process of internalizing an externality means shifting the burden or costs of the externality through taxes, property rights, tolls and government subsidies. As in the example of pollution in Chapter 16. Instead of placing the burden of the pollution on the people breathing the air, the government can place a monetary tax on pollution. So if a company wants to pollute more, they would have to pay more of a tax. This will help shift the burden or costs of the higher pollution from outside the company to inside the company.

Profit maximization in short run and long run are two similar profit maximization strategies. First off with profit maximization in the short run, managers must make two decisions. The first decision is to decide whether to produce or to shut down during that period. After managers make the decision to produce rather then shut down, its next decision is about choosing the optimal level of output. Deciding to produce depends if P>ATC, if P>ATC then it is beneficial to produce, but if P<ATC then the firm has to decide if producing some output will be more beneficial then producing no output and shutting down. The long run profit maximization strategy is similar to the short run but in the short run the manager’s production decisions are limited because some of the inputs used in the short run are fixed costs. In the long run, all inputs are variable so a manager can choose to employ any amounts of capital or plant size. The choice of capital can be referred to as “scale of operation.” It can be fixed in the short run but in the long run it can be altered. Once the firm has decided on a particular size plant or amount of capital, the firm operates in a short-run situation. You can definitely see how they are different. You can say the long run is viewed as the planning stage to the operations. The firm is trying to decide how large of a production facility to create that provides an optimal scale of operations. There aren’t many forms of monopoly pricing but if there is they are subject to some form of government regulation. An example of a firm that employs monopoly pricing in my opinion would be Microsoft with its Windows operating system. Microsoft Windows software runs on almost 90 percent of the worlds PC’s which can be worrisome. If you buy a PC that isn’t Apple, you have Microsoft Windows on your computer. Microsoft can charge almost any price to these computer companies to use the Microsoft Windows operation system because which Microsoft does not have very much competition in the operating system industry with the high barriers to enter (price to develop the operating systems) and Microsoft most likely operates at an economy of scale compared to newer companies in the industry since they probably have better technology to produce these operating systems. If I owned a small business, I would prefer to operate in a monopolistic competition since firms in a monopolistic competition has more market power then a firm in a perfect competition. So a firm in a monopolistic competition have some sort of price-setting ability instead of perfect competition firms that are price-takers. It is important to analyze the different market structures and profit maximization outcomes since each market structure can lead to different profit maximization outcomes. In a perfect competition, the profit maximization depends on the market demand since those firms are price-takers. They cannot choose the price of their product so those firms split demand for those products. A Monopoly is not as worried about profit maximization since they can choose whichever price for their product but at the same time it is a goal for them since maximizing profit is always a goal. In an oligopoly, those firms have some kind of market power so they are sort of price-setters but in an oligopoly there are many substitutes so a drastic rise in price will cause that firms demand to drop for their product.

Firms make production and cost decisions by first finding out there total fixed costs and total variable costs and than figuring out the market cost of their product. If the firm are price takers they can’t charge a price higher then the market cost since demand for their product would drop. Once they find the total fixed costs and total variable costs, they are able to there average fixed costs, AVC, ATC and MC and can graph those curves. With those curves graphed out, you can add your MR curve to the graph. Then using the market cost, the firm can figure out how much of the good to produce. The firm wants to produce as much as possible and spread their fixed costs out as much as possible. They figure out how much to produce by looking at the marginal cost and choose a production schedule where the marginal cost is not greater then marginal revenue. If marginal revenue is greater then marginal cost, the firm is losing money on those next products it produces. The difference between short run and long run production decisions is that during the short run at least one input is a fixed input and during long run production decisions the time period is far enough into the future to allow all fixed inputs to become variable inputs. So in other words, in long run production decisions there are no fixed costs, only variable costs. Economies of scale is beneficial to firms because decreased costs mean they are able to decrease prices to gain a competitive advantage. In other words as the output of a firm increases, the cost per unit of the product reduces. An example of a company that uses the advantages of economies of scale is Intel. According to M. Alden “Intel’s research and development budget is difficult to compete with even with the substantial technological rivals it has. Also with the help of Intel’s semiconductor market dominance and rock solid balance sheet the company can consistently produce cutting edge processors and when caught off guard, it gives them time to adapt to market rivals.”

Alden, M, (2012 January, 12), 7 Companies with Unrivaled Economies of Scale, Retrieved from https://www.dividendmonk.com/7-companies-with-unrivaled-economies-of-scale/

Using what I have learned about indifference curves and budget lines I can use that in my daily life by decided how to spend my disposable income to where I have the most satisfaction. As well as knowing which combinations I would be indifferent about but I feel like I can use this new knowledge to spend my money more wisely. Some factors that effect the price elasticity of demand are the availability of substitutes, the better and more numerous the substitutes for a good, the more elastic is demand. Percentage of consumers budget also effects price elasticity of demand since the greater the percentage of the consumer’s budget spent on the good, the more elastic is demand. The time period of adjustment effects the price elasticity of demand since the longer the time period consumers have to adjust to price changes, the more elastic is demand. A Rolls- Royce has an elastic price elasticity of demand because the percentage change in price would be greater then the percentage change in quantity, or the quantity effect dominates. Having multiple substitutes for these cars as well as the greater percentage of income consumers spend on a car especially a high end car makes the price elasticity of demand that is elastic. Having the knowledge on price elasticity of demand I could help my high end auto business by knowing that if I lower the price of the automobile, demand will rise and total revenue will rise as well and if I raise the price of the automobile, demand will fall, as will total revenue.

What interested me in this chapter was much everything about supply and demand. All the things that could shift supply like a change in the price of inputs or the change in price of substitute goods. It was surprising how demand shifted with complement goods. The books baseball ticket and hot dog reference made me think since I love baseball and the business behind the game. The difference between price-taking firms and price-setting firms is that price-taking firms make a product that is very similar to many on the market so the consumer controls the price since those similar products are all priced the same and the consumer isn’t willing to pay more for that product. So if the price-taking firm was to raise prices the demand for their product would drop significantly. With a price-setting firm they make a product that is unique in some way to rival products or there are only a few sellers of such product in the region. So managers of price-setting firms have the ability to set their own price for the product. The higher the price, the less of the product they will sell and visa verse. An example of a price-taking firm would be a company that makes paper towels or brews a domestic beer. Say if Budweiser started charging $4 more on every pack of beer they sell would drop the demand for their beer greatly and people would choose a substitute product like Coors or Miller. A price-setting firm would be any ski/snowboard company making equipment. As in snowboards they can be made with different materials, cut in different shapes for different terrain, or have different technology into the edges. All those factor in to how much the company can charge for that snowboard they produce. The four kinds of markets include a perfect competition market, a monopoly, a monopolistic competition market and an oligopoly. In a perfect competition a large number of small firms that sell an undifferentiated product with no barriers for new firms to enter. The firms in these markets are price-takers with no market power to control prices. In a monopoly a single firm, protected by some form of barrier to enter, produces a product, that there are no substitute goods for that product. It all depends on the price this company decides to charge for their product. A higher price and consumers are more willing to buy other products trying to find imperfect substitutes. But the existence of the barrier to enter allows the monopoly to raise its price without any economic concern of competitors and new firms. In a monopolistic competition, a large number of firms produce different products with no barriers to enter. These firms have some degree of market power making them price-setters instead of price-takers. But with the absence of barriers to enter the market any economic profit will eventually be bid away by new entrants. Finally in an oligopoly just a few firms produce most or all of the market output. So any one of the firm’s pricing policy will have a significant impact on sales of the other firms in the market. I have worked in restaurants since I was 18 and I have seen how they use marginal analysis to raise prices so profit is maximized.

Thanks for joining me!

Good company in a journey makes the way seem shorter. — Izaak Walton