American Market Economy II

Question 1

Inflation

Answer 1

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation — and avoid deflation — in order to keep the economy running smoothly.

Question 2

Deflation

Answer 2

In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of currency. Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e. when inflation declines to a lower rate but is still positive.

Question 3

Purchasing Power

Answer 3

Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase.

Question 4

Delayed Quotation Pricing

Answer 4

An industrial pricing method in response to inflation in which the seller delays quoting a price until delivery; the method protects the seller against cost over-runs and production delays.

Question 5

Escalator Pricing

Answer 5

A countermeasure to inflation, it is when the final selling price reflects cost increases that occur between the time the order is placed and the time it’s delivered.

Question 6

Recession

Answer 6

A recession is a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income, and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.

Question 7

Value-Based Pricing vs. Cost-Plus Pricing

Answer 7

A countermeasure to a recession, value-based pricing is a price setting strategy where prices are based mostly on a consumers’ perceived value of the product or service. By contrast, cost-plus pricing is a pricing strategy in which costs of production influence the price. Companies that offer unique or highly valuable features or services are better positioned to take advantage of value-based pricing than are companies with commoditized products and services.

Question 8

Bundling

Answer 8

A countermeasure to a recession, bundling is a marketing strategy that joins products or services together in order to sell them as a single combined unit. Bundling allows the convenient purchase of several products and/or services from one company. The products and services are usually related, but they can also consist of dissimilar products which appeal to one group of customers.

Question 9

Unbundling

Answer 9

A countermeasure to a recession, unbundling is a process by which a company with several different lines of business retains core businesses and sells off assets, product lines, divisions, or subsidiaries. Unbundling is done for a variety of reasons, but the goal is always to create a better performing company or companies. Unbundling may also refer to offering products or services separately that had been packaged together.

Question 10

Price Ceiling

Answer 10

A price ceiling is the maximum price a seller is allowed to charge for a product or service. A binding price ceiling is located below the equilibrium price in the market. Price ceilings are usually set by law and limit the seller pricing system to ensure fair and reasonable business practices. Price ceilings are often set for essential expenses; for example, some areas have rent ceilings to protect renters from climbing rent prices. Price ceilings have no effect if the equilibrium price of the good is below the ceiling. In contrast, if the ceiling is set below the equilibrium level, a dead-weight loss is created.

Question 11

Price Floor

Answer 11

A price floor is the lowest amount at which a good or service may be sold and still function within the traditional supply and demand model. It is located over the equilibrium price in the market. Prices below the price floor do not result in an appropriate increase in demand. Price floors may also be set through regulation and result in a minimum price requirement for the good in question. In the absence of a price floor, the free market equilibrium price might be lower. Price floors are used as ‘wage floors’ for minimum wage and for supply management in agriculture.

Question 12

Price Ceilings and Floors - Deadweight Loss

Answer 12

A deadweight loss is a cost to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings, such as price controls and rent controls; price floors, such as minimum wage and living wage laws; and taxation can all potentially create deadweight losses.

Question 13

Binding Price Ceiling

Answer 13

A ‘binding price ceiling’ is set below the equilibrium price usually in response the EP being too high. In contrast to a ‘non-binding price ceiling, which is ineffective because it is placed above the EP.

Question 14

Non-Binding Price Ceiling

Answer 14

A ‘non-binding price ceiling’ is set above the equilibrium price. It therefore has no effect on the market because it doesn’t influence the EP. In contrast to a ‘binding price ceiling’, which is set below the equilibrium price, usually in response the EP being too high.

Question 15

Price Ceilings and Floors - Consumer Surplus

Answer 15

Consumer surplus is an economic measurement of consumer benefits. Consumer surplus happens when the price that consumers pay for a product or service is less than the price they’re willing to pay. It’s a measure of the additional benefit that consumers receive because they’re paying less for something than what they were willing to pay. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.

Question 16

Price Ceilings and Floors - Producer Surplus

Answer 16

A producer surplus is a difference between how much of a good the producer is willing to supply versus how much he receives in the trade. The difference or surplus amount is the benefit the producer receives for selling the good in the market. To calculate the producer surplus, subtract the amount of money the producer received for its product by the minimal amount of money it was willing to accept. A producer surplus is generated by market prices in excess of the lowest price producers would otherwise be willing to accept for their goods.

Question 17

Price Elasticity of Demand and Consumer Surplus

Answer 17

The majority of demand curves in markets are assumed to be downward sloping, in contrast with perfect elasticity and inelasticity. When demand is inelastic, there is a greater potential consumer surplus because there are some buyers willing to pay a high price to continue consuming the product. Businesses often raise prices when demand is inelastic so that they can turn consumer surplus into producer surplus!

Question 18

Price Ceilings and Floors - Relationship between Producer Surplus and Consumer Surplus

Answer 18

A producer surplus combined with a consumer surplus equals overall economic surplus or the benefit provided by producers and consumers interacting in a free market as opposed to one with price controls or quotas.

Question 19

Economics - Competition

Answer 19

Competition can be defined as the rivalry among the producers to achieve increasing profits, higher sales numbers, etc. In other words, companies wish to sell as much as possible while making the most money.

Question 20

What factors determine the price of a good or service in economics?

Answer 20

Supply, demand (which is the competition among the buyers), and competition among producers.

Question 21

Employee Stock Option

Answer 21

An employee stock option is a contractual right that entitles an employee to purchase shares of the company’s stock at a set price sometime in the future. Employees must hold the stock options for a specific period of time before exercising them, which is called the vesting period. The more successful the company becomes, the more valuable the stock options will tend to be.

Question 22

Profit Sharing

Answer 22

In profit sharing, employees are rewarded if a company’s profits increase. It’s a way for employees to have an added stake in the company’s success. A profit-sharing plan has a formula that provides a fixed percentage of profits that will be divided among employees. Consequently, employees are motivated to perform well so the company profits increase, which results in a cut of the profits for them.

Question 23

Gain Sharing

Answer 23

Gain sharing focuses on employee participation in management and rewarding employees for increases in efficiency that result in cost savings. Instead of sharing in increases in profits, employees share in the gains realized by the savings due to reduction in waste and increases in efficiency.

Question 24

Financial Markets

Answer 24

Financial markets are any marketplace where buyers and sellers participate in the trade of assets, such as equities (or stocks), bonds, and currencies. The financial market is made up of several different sub-markets, with two of the largest markets being the capital and money markets.

Question 25

Financial Markets - Capital Market

Answer 25

A submarket of the Financial Market, the Capital Market is a place where individuals and institutions trade financial securities. Two of the biggest capital markets are the stock markets and bond markets.

Question 26

Financial Markets - Money Market

Answer 26

The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities (less than a year) are traded. Instruments used in the money markets include deposits, collateral loans, acceptances and bills of exchange. Institutions operating in money markets are central banks, commercial banks, and acceptance houses, among others.

Question 27

Goods Markets

Answer 27

Goods markets are often the most studied markets in economics and are in any place where buyers and sellers of goods meet for potential transactions. All the grocery, birthday, and holiday shopping you participate in every month takes place in the goods markets. Supply and demand analysis, the job you have, and the GDP numbers the government release quarterly are all heavily driven by the goods markets. Consumer, disposable, and durable goods are just a few of the common categories in the goods market.

Question 28

Goods Markets - Consumer Goods

Answer 28

Consumer goods - Goods such as decorations and typical household items that satisfy personal needs, rather than those required for the production of other goods or services.

Question 29

Goods Markets - Consumer Goods: Disposable Goods

Answer 29

Disposable goods - Consumer goods that are used up a short time after purchase, including deodorant, food, perishables, newspapers, and clothes.

Question 30

Goods Markets - Durable Goods

Answer 30

Durable goods - Goods that require infrequent replacement, such as appliances, furniture, and the car you drive.

Question 31

Profit-Orientated Pricing Strategy or Market-Oriented Strategy

Answer 31

A profit-oriented pricing strategy involves setting prices for your products that will guarantee you’ll make money on each sale. You determine your cost for manufacturing each product, then add a percentage for profit. Profit-orientation pricing strategy is composed of target profit pricing, maximizing profits, and target return pricing.

Question 32

Profit-Orientated Pricing Strategy - Target Profit Pricing

Answer 32

Target profit pricing’s ultimate goal is to reach a particular level of profit by using price to get sales that produce a certain profit per unit. In this manner, a specific price needs to be selected that will bring in sales but also maximize profits. Profit-orientation pricing strategy is also composed of maximizing profits and target return pricing.

Question 33

Profit-Orientated Pricing Strategy - Maximizing Profits Pricing

Answer 33

The theory is that if a firm can create a mathematic model that captures all sales and profit information, then it should be able to identify a specific price that will maximize profits. The biggest issue with this model is that it is very hard to develop a working mathematic model. Profit-orientation pricing strategy is also composed of target profit pricing and target return pricing.

Question 34

Profit-Orientated Pricing Strategy - Target Return Pricing

Answer 34

Target return pricing focuses on specific rates of profit and wants to use pricing strategies to get to measurable return on investment to placate stockholders. This method is most concerned with rates of return on investment. Profit-orientation pricing strategy is also composed of target profit pricing and maximizing profits.

Question 35

Sales-Orientation Pricing Strategy

Answer 35

A sales-oriented marketing strategy is one in which a company focuses all of their marketing efforts on selling the product that they produce. This strategy is effective for companies that sell ‘unsought’ goods such as burial plots and life insurance, but can be risky for others. Companies that use a sales-oriented marketing strategy are so focused on selling their products that they are often blindsided by changing customer needs and technological advances. A sales-oriented strategy differs from a market-oriented strategy in the following ways: - Companies that use a sales-oriented marketing strategy focus on selling what the company makes, not necessarily what the customer wants. - Companies that use a sales-oriented marketing strategy also pay very little attention to the changing needs of their customers or to the changes that take place in the marketplace. - Companies that use a sales-oriented marketing strategy put a higher premium on short-term, one-off sales than on having a long-term relationship with their customers.

Question 36

Competitor Pricing Strategy

Answer 36

Competitor pricing strategy is very common with companies such as airlines and supermarkets. The goal is to set prices based on their competition.

Question 37

Competitor Pricing Strategy - Status Quo

Answer 37

Airlines also follow a type of competitor pricing called status quo, which means companies only change prices to meet competitors. For example, if Airline A drops prices by $100 on all East Coast flights, then Airline B will quickly match Airline A’s prices.

Question 38

Customer Orientation Strategy

Answer 38

This entails focusing on value and what the customer expects. If a company is known for high-end technology, then the price should be set as a premium with limited stock available. The company could also use a base price with no sales discount to communicate the overall value for a non-premium product.

Question 39

Liquidity

Answer 39

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable prices. Cash is considered the most liquid asset, while real estate, fine art, and collectibles are all relatively illiquid.