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Price discrimination

practice of selling a product or service at different prices to different consumers when those price differences are not justified by cost differences


Examples of price discrimination

- Senior discount before 5pm
- Grocery store provides coupons to everyone
- Airline charges 175$ 14 days out and 400$ 2 days out for the same route


Domestic or global mergers/acquisitions allow an organization to:

- lower risk by diversifying into additional industries
- enter new markets
- provide possible opportunities for quick profitability in new areas
- provide opportunities to take advantage of economies of scope
- potentially lower costs along the value chain of activities
- broaden the strength of resources and capabilities


Diminishing Marginal Utility is

the marginal (additional) utility gained from successive units decreases as the number or units purchased (or consumed) increases ex. The more candy bars that a person eats, the less satisfaction derived from eating an additional candy bar


Supply chain metrics are created to measure the performance of the supply chain. If a firm developed metrics to measure things such as fill rates and on-time delivery, we would assume that they are trying to measure

customer service


A characteristic that indicates an item has a high price elasticity of demand:

the item has many similar substititues


Price Elasticity of Demand =

Change in Qty / Change in Price


Summary of Price Elasticity of Demand outcomes

Elastic >1.00


Economies of Scale are

the reduction in average total cost of production when a firm expands plant production Ex. @ 110 units, cost of production = $58K per unit. When you add 120 units more, cost of production = $50K


Diseconomies of Scale

Begin where the average total cost starts going up


How should output and price change to increase profits when marginal costs (MC) are $3 and marginal revenue (MR) is $5?

Increase output and Decrease price as long as MR > MC


If a company strives to be the low-cost provider within an industry, this means that:

the company may underprice the competition and attract the buyers in a large enough volume in order to obtain satisfactory profits


A company has a policy of frequently cutting prices to increase sales. Product demand is significantly elastic. What impact would this have on qty and price?

Qty increases proportionally more than price declines


If average household income increases, then the housing market will experience:

a rightward shift in the demand curve


Factors that create a shift in the demand curve

include income, prices of related goods, number of buyers, preferences, and expectation of future prices


Monopolistic Competition






When there is equilibrium in a monopolistically competitive industry, a firm

will operate inefficiently with price greater than marignal revenue


Collusive Pricing is

when a price to external customers is established higher than the competitive price for a given industry; competitors agree to restrict production so as to increase the price they receive for their product Ex. Cartel


Dual Pricing is

the practice of setting different prices for a product dependent on the currency used to buy it


Predatory Pricing is

meant to lower prices to such an extent as to drive competitors out of business


Transfer Pricing is

the price charged by one unit within a larger business to another unit in that business


The Average-Marginal Rule states

- if marginal > average then the average rises
- if marginal


Companies use strategic alliances and collaborative partnerships to

- open up or improve access to new markets
- learn from other companies by sharing technology and various expertise
- improve supply chain efficiency
- get into critical countries in an effective and efficient manner
- gain access to necessary resources


Differentiation strategies can be successful when:

the product is of value to the consumer and cannot be easily duplicated


Perfect competition is

characterized by a large number of sellers producing a standardized product with easy entry and exit into and out of the industry. An individual seller has no ability to influence the product price.


Economic Rate of Return on Common Stock =

[Dividends Received + (End price - Begin price)] / Beginning Price


All other things being equal, movement along a supply curve occurs if:

the price for the product increases or decreases


Explicit Cost (accounting cost) is

- easy to identify and account for
- cash outflows
- Ex. wages, utilities, rent, raw materials, other direct exp


Implicit Cost (economic cost) is

- any cost associated with not taking a certain action
- difficult to quantify
- similar to intangible cost
- Ex. time and effort an owner puts into maintenance rather than working on expansion


When implicit costs are greater than zero and economic profits in an industry equal zero:

accounting profits will be > 0.

Economic profit is generally lower (never higher) than accounting profit due to the fact that implicit costs are included in the calculation of in economic profits.


A best-cost producer can gain a competitive advantage:

by delivering a superior product at a lower price than the competition. i.e. give the buyer more value for their money


Income and employment tend toward an equilibrium level where:

aggregate supply = aggregate demand AND intended savings = intended investment


Law of Diminishing Returns states

as increasing larger amount of variable inputs are combined with fixed inputs, at some point the marginal, physical product will begin to increase at a decreasing rate and eventually the marginal physical product will decline


The best concept to understand oligopoly behavior is

the game theory model


The phrase, “The use of a network of autonomous or semi-autonomous business entities collectively responsible for procurement, manufacturing, and distribution activities associated with one or more families of related products,” is one possible definition for:

Supply Chain Management


The Law of Demand states

there is an inverse relationship between the price of a product and the quantity demanded of that product Ex. higher price, lower qty demanded


A niche (focus) strategy based on differentiation can be attractive if

the market has distinctive buyer groups who have specific needs in product attributes or have different uses for the product.


Mutual interdependence is

each firm in an oligopolistic industry must consider the reactions of its rivals when it makes decision concerning how to price its product


Demand Curve reflects

the impact that price has on the amount a product purchased


Similarity between Perfectly competitive industry and Monopolistically competitive industry:

no significant barriers to entry in either market structure


A city ordinance that freezes rent prices may cause

demand for rental space to exceed supply


If the price for a product increases and the demand curve for a second product shifts to the left, then:

the products are complementary goods


In supply chain mgmt, key difference between traditional manufacturing and demand mgmt is

that products are pulled through the production process in response to specific customer needs


If consumer income increases and as a result the demand for housing increases, we can conclude that housing is

a normal good


A profit-maximizing firm operating in a competitive market in the short run will increase output:

as long as marginal revenue is greater than marginal costs


Economic Profit =

Total Revenue - Total Explicit Costs - Total Implicit Costs


Key Objectives of Supply Chain Mgmt

- Reduce supplier base while developing supplier relationships
- Standardize parts to reduce inventory levels
- Improve communications at levels of the organization to create an uninterrupted flow of materials and products


Suppliers have more power when"

- the product they are supplying is differentiated
- substitutes are not available
- few companies product the same product
- the purchasing industry is not an important customer to the supplying industry


In monopolistic competition, the goal of product differentiation and advertising is to:

make the firm's demand curve less elastic so that consumers are less responsive to changes in price


Technology is constantly changing. An improvement in production techniques that allows for a larger output for a given amount of inputs would result in:

a shift of the supply curve to the right resulting in more of the product being offered at each price