How Much is the Cost of Zero Cost?
To a neo-classical economist zero is just another price. To the average coustemer it brings to the mind the word of free. We are always trying to get something for nothing so if something is free then consumers impulsively take the option. Ariely shows how this impulse comes with hidden costs that debunk the myth of rational consumers. Whether it’s from eating too much free food or accumulating worthless free pens, clickers etc, people are always trying to get a free lunch.
As usual (this is what is so great about the book) Ariely did an experiment to find the answer. He set up a stall with offering two piles of chocolates, the first being Lindt truffles and the second being Hershey kisses. He sold the Lindt for 15 cent and the Hershey for 1 cent. Due to their superior quality 73% choose Lindt and 27% chose Hershey’s. So far, so good. An economist would say that Lindt was obviously a superior product and as the benefit from it outweighed its cost better than Hershey did, it sold better. So Ariely knocked one cent off the price of each chocolate, so that the Lindt truffle cost 14 cent and the Hershey kiss was free . If Lindt was a superior product then it should hold its place as its relative price hadn’t changed, it still cost 14 cent more than Hershey. Sure the proportions had changed, but one cent is the same amount in your pocket regardless of proportions. You don’t buy goods in proportions; you buy them in absolute amounts. Any
Author Wheelan writes, "Life is about trade-offs, and so is economics." Indeed, so is Naked Economics. This book promises to be a good introduction to economics for the layman. Throughout the book, the author uses easy-to-understand language and vivid examples to illustrate his points in strategic places maintaining a sense of lightness with the readers in reading the material. Here is a summary of each of the 12 Chapters of the book Naked Economics: Undressing the Dismal Science by Charles Wheelan.
1. The first chapter in the book is about the market and its inner workings. The book briefly explains the idea of supply and demand, in which the price of a certain good or service will reach the point where all the demand is equivalent to the supply. However, the value of something is not determined by its necessity, but its desire within society, as seen by the difference in cost between a diamond and life giving water. Markets operate as they do because people try to maximize the amount of utility for themselves. Nevertheless, a strict rationalism model cannot be used for predicting all the occurrences of a market because of the ever changing behavior of people; thus economists must take precautions against
However, if the school allows a competing student the right to sell ice cream on school property, it could change the price of ice cream. The price of ice cream is lowered due to technology. The invention of better ice cream machines or an idea to make better use of counter space can lower a firm’s cost and raise the quantity of ice cream it supplies. Prices could also be increased due to input prices. Less ice cream is supplied when workers need be paid more, therefore ice cream machines cost more, or even ingredients like
It is a definite tie in to the previous principle as most consumers are looking to get the most for the least. Restaurants are starting to use promotions of smaller portions for smaller prices in order to compete with the growing money saving tight budgeted crowd. Mankiw (2007) provides a great example of this by stating “For example, when the price of an apple rises, people decide to eat more pears and fewer apples because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples because the benefit of selling an apple is also higher. As we will see, the effect of a good’s price on the behavior of buyers and sellers in a market—in this case, the market for apples—is crucial for understanding how the economy allocates scarce resources.” (p. 7)
Michael J. Sandel starts his article “What Isn’t for Sale?” by listing examples of items and perks we are given the option to buy. Even though you can buy almost everything, Sandel also lists options you can sell if you need some money. He addresses the main problem we face in a society where everything can be purchased and that markets have dictated our lives. However, since almost everything is for sale, capitalism is successful and the market is doing well. The downside to this is that people are beginning to put a price on everything. Towards the end of the Cold War, buying and selling became more of a constant need that consumers unconsciously accepted.
* From the scenario for Katrina’s Candies, examine the key factors affecting the demand for and the supply of a good in general and Katrina’s Candies specifically. Distinguish between a change in demand and a change in the quantity demanded (movement along the demand curve).
In a 24 hour period my initial pricing was $7.27; I was not surprised as to how much I spent on a daily basis. From a very young age, when my mother would grocery shop she was very frugal on what she would buy and how much she spent. We never had name brand labels, always the off brand product and we had canned vegetables(not to say we didn't have a lot of fresh vegetables too), from this I learned how unimportant it was to buy name brand food, just because of the brand. So now as I spend my money, I am more aware of what I buy and how much I spend. On a regular basis, my mother and I shop at the 99 Cent Store, this is a chain store that offers produce, refrigerated foods and other products for either 99 cents or a little above that price (ex:milk=$2.99). Therefore, I believe I got an advantage when assigned this experiment; because I knew where to get cheap products that would put me under $5 a day. Even though I was not excited when getting this assignment because I knew I would have to
Everyday there are things being bought and people buying them. Someone must have thought about hoe it would be like to not buy anything. They might have thought about a day when they do not spend their money. The day called Buy Nothing Day helps to fill the curiosity. The day encourages people to not buy anything. Buy Nothing Day helps understand what it would be like to buy nothing, how much money is spent, and realize how money affects everything.
In other words most people would prefer to pay more and buy a more expensive product thinking that by paying more it is also superior to the other products of the same category that are cheaper. However, although the phrase “you get what you pay for” might have some validity in it that is not always the case, due to the fact that sometimes the products that might be cheaper are just as good as the competitor brand which has a higher price. In this instant it would be logical to buy the cheaper product however most human beings would opt for the expensive product, assuming that it is of better quality than the cheaper product. On the other hand, Dan Ariely rebuffs this claim and states, “We choose what we like, not what's best.” Sometimes humans don’t make decisions based on their preferences; instead they choose what they want and that leads to a process of rationalisation in order to get what they really want. However, they still want to give the impression that they were acting according to their preferences.
The rise of industrialization and manufacturing that began in the eighteenth century has drastically changed the lifestyles of the world. No longer do citizens find, make, or trade for everything they need at home and in their local communities, but instead they rely on national and global commerce to provide for them. This shift in production is the basis for the annual Buy Nothing Day, which attempts to reverse the ill effects of gross consumerism and spread awareness of the issues in our current lifestyles. While many critics would point to the fact that one day will provide little to no discernable impact on the problems faced, Buy Nothing Day will produce greater effects through the awareness it provides than any actual deeds committed on that singular day.
With the increasing trend in healthy diet preference, the underlying drivers of change of competition in premium chocolate industry at the strongest level are the buyers’ preferences for differentiated, refined products, instead of standardized ordinary products that are no longer demanded. In addition, baby boomers - generation with their disposable income are spending a lot on high quality premium chocolates.
The possibilities for product differentiation are numerous in that there are many different ways to make chocolate, many different items to add to chocolate, and many different ways to use chocolate. Having so many different options to market chocolate could present an open door for competitors, creating their own niche to draw customers. A large number of products to choose from could also make it difficult for Roger’s to draw customers to its own products, decreasing their profit potentials.
The following statistics stated in the case indicate that “23% of respondents would definitely buy the Montreaux dark chocolate with fruit product and 40% would probably buy the product.” These average ratings strongly suggest that this product should be introduced into the market very gradually. This strategy would enable the company to evaluate consumer buying patterns so that the company could determine future production levels and future marketing strategies that benefit both the company and the consumer. Financial information given in the case also indicates that the company needs to introduce this product very conservatively. Exhibit 1 informs that with 5.98 million total purchases, low awareness, low ACV and mediocre product, Montreaux would gross $17.44 million. Exhibit 2 shows that with medium awareness, medium ACV and an average product Montreaux would gross $25.1 million. These figures do not meet Montreaux’s objective of earning at least $30 million in its first year. Exhibit 3 shows a slightly improved situation: with high awareness, high ACV, and an excellent product, Montreaux would gross
The table on the next page shows how BonBonHolic came up with P50 product price for its chocolate
Marginal Utility by definition is the additional satisfaction a consumer gains from consuming one more unit of a good or service, which is usually positive, but can be negative. The concept implies that the utility or benefit to a consumer of an additional unit of a product is inversely related to the number of units of that product he already owns. The notion of marginal utility originated with attempts by 19th-century economists to examine and describe the economic validity of price. They believed price was partially determined by a commodity’s utility, which led to a paradox when applied to predominant price associations. This problem, commonly referred to as the