Archive for January, 2009

Jan 28 2009

Product differentiation in imperfectly competitive markets – the MacBook Wheel

In  IB Economics, we are currently learning about how firms in imperfectly competitive markets differentiate their products in order to increase their market power and their price-making power.

In a market with a few large firms such as the laptop computer market, companies must do what they can to increase demand for their own products over those of their competitors. Apple Computer is an example of a company that has successfully differentiated its line of laptop computers in recent years, regularly improving the features of its line of MacBooks to attract consumers away from its competitors and into the world of Macs.

Last year Apple launched the MacBook Air, the lightest and thinnest laptop on the market, creating a huge buzz in the technology world and converting millions to Apple’s line of laptops. This year, Apple has launched yet another innovation in laptop computing, in the hope of once again increasing demand for its products, and making consumers think they cannot live without the sleek, shiny Apple computers. This year’s innovation? The “MacBook Wheel”… watch:

Apple Introduces Revolutionary New Laptop With No Keyboard

The goal of an imperfectly competitive firm like Apple is to increase its market power by increasing demand for its particular product through product differentiation, advertising, developing brand loyalty, and “hype”: all forms of non-price competition. If Apple were to simply charge a lower price than its competitors for its products, it would also succeed in increasing the amount of computers it sells to consumers, but may also end up accepting lower profits due to the lower prices it must sell for.

Through differentiation, which means making its products unique and attractive to consumers, Apple attempts to increase market demand for its computers, while simultaneously making demand less elastic. With higher, more inelastic demand, Apple gains price-making power over the laptop computer market, as can be seen in the graphs below, which show that after the successful launch of a new product like the MacBook wheel Apple is able to charge a higher price, produce a similar quantity, and earn greater economic profits.

In the video, one customer says that he’d buy “buy almost anything if it’s shiny and its made by Apple”. Such statements reflect that among loyal customers, demand for Apple’s products is highly inelastic. While the firm is certainly not a monopolist in the market for laptop computers, Apple has surely succeeded to increase its market power and thus its power over prices through product differentiation, brand loyalty, and the “hype” surrounding the launch of new products like the MacBook Wheel.

Discussion questions:

  1. In the graphs above, the slopes of the demand curve increases after successful product differentiation by Apple. Why does this happen?
  2. Assuming the market for laptop computers is monopolistically competitive, what will likely happen to Apples economic profits over time? What must Apple do if it wishes to maintain its profits in the long-run?
  3. What are some real ways companies like Apple and its competitors have attempted to differentiate their products over the years? Would YOU buys a MacBook Wheel if it were real?

309 responses so far

Jan 19 2009

“The Ascent of Money” – Economic historian Niall Ferguson on the Colbert Report

Niall Ferguson | January 13th |

Harvard Economic historian Niall Ferguson on the Colbert Report explains the concept of “invisible money”. I just bought Ferguson’s new book, The Ascent of Money over the holidays and am looking forward to reading it. In his interview with Colbert, the historian explains that money as we know it is only worth something because we think it is worth something. Colbert can’t seem to believe that there’s no underlying intrinsic value such as a gold standard backing the value of his dollar bill, which has in fact been the case since the early 1970s in America.

Ferguson says that money represents a relationship of trust between a creditor and debtor, which is one reason there seems to be so little money available for spending in the economy today. Macroeconomic uncertainty and low consumer confidence are the main causes of the today’s global recession. In a climate of fear and uncertainty, the trust underpinning our monetary system dries up. Banks are afraid to make loans, consumers are afraid to make big purchases, and firms are afraid to make capital investments. The result? Low aggregate demand, falling income and output and rising unemployment.

Paul Krugman, in his latest book the The Return of Depression Economics argues that the fundamental solution to a financial crisis such as today’s is to drastically increase the money supply. The $350 billion that the Bush administration has pumped into the financial system already seems to have done very little to prime the economic pumps, so to speak. To restore trust, and thus stimulate real spending in the economy once again, creating income, output, and real employment, massive monetary stimulus will be needed. A trillion dollar stimulus package by an Obama administration should not come as a surprise, should it be put to the nation to vote on in the near future.

Our love of money is a little less impassioned than it was a few years ago, according to Ferguson. Not because money no longer serves an essential function in our lives, rather because we have lost much of our faith in our monetary system’s ability to create and maintain stable economic conditions and long-run economic growth. To restore Americans’ faith in the almighty dollar and put the economy back on a track towards stability and growth, a massive fiscal and monetary stimulus is needed. Okay, time to start reading The Ascent of Money and to watch less Comedy Central!

8 responses so far

Jan 18 2009

Competition and rising costs force Southwestern farmers to consider alternatives

NPR : Farmers May Switch Crops Due to Labor Shortage

Pure competition forces firms to produce their output in the most efficient manner. Productive efficiency is achieved when producers achieve their minimum average total cost. Any increase in costs may lead to economic losses for a firm, and if costs increase too much a firm may be forced to shut down.

The scenario above is basically a textbook explanation of the reality faced by farmers in the American Southwest this very day. Hundreds of fruit and vegetable farmers are facing higher variable costs as tougher border security and immigration laws has led to a shortage of cheap labor, which the farmers depend on in the labor-intensive fruit and vegetable industry.

Listen to the podcast above, then study the graphs that accompany this article.

Rising costs for in a perfectly-competitive (PC) industry: Click on the thumbnails of the graphs to see the full-sized versions

economic profitEconomic lossesShut down scenario

Discussion Questions:

  1. What changes have occurred in the American fruit and vegetable industry?
  2. What are the possible outcomes for Southwest farmers?
  3. How might technology help save these growers from having to shut down their operations?
  4. What other alternatives do they have to shutting down in the long run?

181 responses so far

Jan 07 2009

A new year ahead on Welker’s Wikinomics Blog

It has been several weeks since my last post on WW. Of course, the holidays are supposed to be a time of rest and relaxation, as well as lots of skiing here in Switzerland.

As we return to class at Zurich International School next week, I will once again resume blogging for economics teachers and students. My intention is to cut back slightly on the frequency of the posts I write this year. During 2009, readers can expect between 1 and 3 posts per week. Additionally, I intend to re-vamp and re-publish some of the nearly 400 posts that have been published here over the last two years, adapting them to current economic situations and connecting them to the syllabus of our introductory AP and IB Economics courses.

Another project in the works during the coming months here is the Welker’s Wikinomics AP and IB Economics Exam Study Guides. Last May, I published v1.0 of my Micro and Macroeconomics study guides right here to the blog for free download. Hundreds of copies were downloaded in the weeks leading up to the AP and IB Exams by students all over the world. This year, I intend once again to post study guides for Micro and Macroeconomics, as well as Intenrational Economics and Development Economics. The study guides will cover every unit of AP and IB Economics, and will once again be available for free download to students and teachers interested in using them for review.

What makes my study guides unique over the popular study guides from publishers like the Princeton Review and Barron’s is that they are PDFs containing active hyperlinks to websites and blog articles that can be used to enhance the review experience and give students relevant real world examples to incorporate into test answers. Also, my study guides are full-color and focus on graphical representation of economic concepts, rather than lengthy written explanations.

Expect the study guides to be published some time around mid-April, in time for students to download them for May’s AP and IB Exams.

To my students and other readers of Welker’s Wikinomics Blog, thanks for all your contributions in the comments, please keep visiting regularly to read the latest posts aimed at connecting the world-changing events shaping our economy and society to the concepts from AP and IB Economics.

5 responses so far