Here is a great infographic about the iPhone that I got from colleague David Parr. It shows the impact the iPhone has had on the global supply chain, jobs and the world in general. Some statistics from it are as follows:
1. To assemble 1 iPhone = 600 workers
2. 500,000 iPhones produced in 1 day (at peak)
3. 307,250 jobs have been created by Apple
4. 44% are sold in North, Central and South America. 9% are sold in Japan alone.
5. There are 330 manufacturing locations in China.
I alluded to in a previous post that one model of oligopoly revolves around how a firm perceives its demand curve. The model relates to an oligopoly in which firms try to anticipate the reactions of rivals to their actions. As the firm cannot readily observe its demand curve with any degree of certainty, it has got to estimate how consumers will react to price changes.
In the graph below the price is set at P1 and it is selling Q1. The firm has to decide whether to alter the price. It knows that the degree of its price change will depend upon whether or not the other firms in the market will follow its lead. The graph shows the the two extremes for the demand curve which the firm perceives that it faces. Suppose that an oligopolist, for whatever reason, produces at output Q1 and price P1, determined by point X on the graph. The firm perceives that demand will be relatively elastic in response to an increase in price, because they expects its rivals to react to the price rise by keeping their prices stable, thereby gaining customers at the firm’s expense. Conversely, the oligopolist expects rivals to react to a decrease in price by cutting their prices by an equivalent amount; the firm therefore expects demand to be relatively inelastic in response to a price fall, since it cannot hope to lure many customers away from their rivals. In other words, the oligopolist’s initial position is at the junction of the two demand curves of different relative elasticity, each reflecting a different assumption about how the rivals are expected to react to a change in price. If the firm’s expectations are correct, sales revenue will be lost whether the price is raised or cut. The best policy may be to leave the price unchanged.
With this price rigidity a discontinuity exists along a vertical line above output Q1 between the two marginal revenue curves associated with the relatively elastic and inelastic demand curves. Costs can rise or fall within a certain range without causing a profit-maximising oligopolist to change either the price or output. At output Q1 and price P1 MC=MR as long as the MC curve is between an upper limit of MC2 and a lower limit of MC1.
Criticisms of the kinked demand curve theory.
Although it is a plausible explanation of price rigidity it doesn’t explain how and why an oligopolist chooses to be a point X in the first place. Research casts doubt on whether oligopolists respond to price changes in the manner assumed. Oligopolistic markets often display evidence of price leadership, which provides an alternative explanation of orderly price behaviour. Firms come the conclusion that price-cutting is self-defeating and decide that it may be advantageous to follow the firm which takes the first steps in raising the price. If all firms follow, the price rise will be sustained to the benefit of all firms.
If you want to gradually build the kinked demand curve model download the powerpoint by clicking below.
Below is a video from the Economics Online website that focuses on Price Discrimination. Useful for A2 micro. Here are some notes from the website:
First-degree price discrimination, alternatively known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.
Second-degree price discrimination means charging a different price for different quantities, such as quantity discounts for bulk purchases.
Third-degree price discrimination means charging a different price to different consumer groups. For example, rail and tube travellers can be subdivided into commuter and casual travellers, and cinema goers can be subdivide into adults and children. Splitting the market into peak and off peak use is very common and occurs with gas, electricity, and telephone supply, as well as gym membership and parking charges. Third-degree discrimination is the commonest type.
Necessary conditions for successful discrimination
Price discrimination can only occur if certain conditions are met.
1. The firm must be able to identify different market segments, such as domestic users and industrial users.
2. Different segments must have different price elasticities (PEDs).
3. Markets must be kept separate, either by time, physical distance and nature of use, such as Microsoft Office ‘Schools’ edition which is only available to educational institutions, at a lower price.
4. There must be no seepage between the two markets, which means that a consumer cannot purchase at the low price in the elastic sub-market, and then re-sell to other consumers in the inelastic sub-market, at a higher price.
5. The firm must have some degree of monopoly power.
The graph from National Australia Bank below shows the components of Australian GDP March Quarter 2014. This is particularly useful when doing GDP Expenditure approach in Unit 5 of the A2 Cambridge course where you can breakdown the equation C+I+G+(X-M).
C = Private Consumption
I = Business Investment
G = Government Demand
(X-M) = Net Exports
Consumption is still the largest contributor to Australia’s GDP. Over the next couple of years GDP is expected to grow around 3% but key to meeting that target is a solid consumer sector. Household consumption growth in recent quarters has been solid, contributing 0.3 percentage points to growth in Q1 – only exports have contributed more to growth over the past year. However sustaining solid consumption growth in years ahead requires the labour market to improve and consumer confidence levels to recover from their recent lows.
The New Zealand Parliamentary Library “Monthly Economic Review” published a feature on taxes and levies on petrol.
Taxes and levies on a litre of petrol in New Zealand account for approximately 43 percent of the overall price.
July 2014 – Retail price = 223.9 cents per litre
A forecast $1,702 million is expected to be raised through the excise duty on petroleum in the year ended June 2015. This includes:
- $936 million in petroleum excise duty on domestic production
– $766 million on petroleum imports.
The following diagram shows the taxes and levies on a litre of petrol (including GST).
This is a market structure in which there are a large number of firms selling commodities which are very close substitutes. There are weak barriers to entry and firms may enter the industry with ease. Notice on the diagram that the firm initially makes supernormal profit at Q0 – at MC=MR Price = P0 and Cost = AC0. However with weak barriers to entry these profits are competed away and they now produce at Q1 where at MC=MR and the Price and Cost = AC1
Modern capitalism is characterised by a large number of ‘limited’ monopolies. They are sole suppliers of branded goods, but other firms compete with them by selling similar goods with different brand names. This is the market structure described as monopolistic competition. Thus the commodities produced by any one industry are not homogeneous; the goods are differentiated by branding and the use of trade marks. The individual firm has a monopoly position, but it faces keen competition from firms supplying very similar goods. It has, therefore, only a limited degree of monopoly power – how much depends upon the extent to which firms are free to enter the industry. Product differentiation is emphasised (some would say, created) by the practice of competitive advertising which is, perhaps, the most striking feature of monopolistic competition.
Advertising is employed to heighten in the consumer’s mind the differences between Brand X and Brand Y. It is important to realise that we are concerned with the differentiation of goods in the economic sense and not in the technical sense. Two branded products may be almost identical in their technical features or chemical composition, but if advertising and other selling practices have created different images in the consumer’s mind, then these products are different from our point of view because the consumer will be prepared to pay different prices for them.
Many thanks to Year 12 student Andrew Reeves for this article from the MailOnline which shows the similarities between what the higher, middle and lower income groups prioritise with regards to their spending.
It classed the rich as those who earn $150,000 and more per year, the middle classes are those who bring in an annual income of between $50,000 and $69,000, while the poor scrape by on between $15,000 to $19,000.
Housing, by far, makes up the largest chunk of citizens’ expenditure. Regardless of income levels, affluent, middle class and poor residents spend a similar percentage on the home – between 26.7 and and 29.2 per cent.