Fascinating economy

Traditionally, news media is a subset of mass media with its own content and purpose. In recent years, however, the lines between general mass media and news have blurred.

Influencing Consumer Behavior

Television, magazines, and other media can be highly influential. Popular sitcoms create images of consumption that inform our own consumer behavior.

Consciously or not, some people adopt the styles, fashions, and even attitudes of their favorite TV characters. Some consumers make decisions based on their desire to look or live in a way that resembles the lifestyles they see on TV.

Magazines can have a big effect on consumer behavior, as well. Fashion magazines influence some women’s perception of beauty and influence the products they buy. Men’s magazines also influence how men see themselves. They have articles that include news, sports, men’s fashion, and even lists of the top outfits men should have in their closets.

Some people adopt the styles they see on their favorite shows.

Mass Media

Mass media has a big effect on how consumers view themselves.

Companies advertise their products and services in all forms of media. This is done indirectly through product placement and directly through advertising.

Advertising is the biggest method used by producers to influence consumer behavior.

There are many methods and techniques of advertising. You are probably familiar with most of them already. TV commercials, magazine ads, billboards, and even signs on the sides of buses all infiltrate our lives on a daily basis.

On the Internet, most Web pages contain advertising, often including pop-up screens and animations. You can get advertising delivered directly to your cell phone, too.

It pays to advertise.

Over the years, the sophistication of advertising techniques has advanced, as have breakthroughs in communication technology. Many people use the Internet every day and depend on it to get information. This makes the Internet an enticing vehicle for advertisers. Unlike radio, television, and print sources, the Internet is a nonlinear form of media, making it possible to advertise in various ways. Banner ads, pop-up windows, corporate Web pages, and bulk e-mails are some of the methods used.

Advertising Strategies

The main purpose of advertising is to get consumers to demand more goods and services. There are many ways to do this. One is to create a need for a product by emphasizing the connection between a product and a certain aspect of life.

For example, most people want to be clean. Soap and shampoo are needed to be clean, but is that all? If advertising can convince consumers that they also need deodorant and conditioner to feel clean, then more people will buy deodorant and conditioner.

Advertisers can also succeed at increasing demand by getting people to see luxuries as necessities. This is usually just a perception – you think you cannot live without something when, in fact, you probably can.

The Brand-Name Game

In our fast-paced world, producers know that consumers like to find what they need quickly and conveniently. Today, you can order a product online from anywhere in the world and have it delivered to your house in a matter of days.

This leads to a lot of competition among producers who want consumers to buy their stuff. This is another purpose of advertising – to get people to choose a specific product or service instead of the same thing provided by a competitor.

One method used by companies to get people to buy their products instead of someone else’s is branding. Branding gets people to recognize a particular company’s product and associate it with quality and popularity. Some brands can even succeed in becoming common names for the products they sell, such as Kleenex or Band-Aids.

Branding is not the only method that advertisers use. Advertisers know that consumers are more likely to buy products that they identify with, so they make ads that appeal to people by telling a story or connecting the consumer to the product.

Some brands are so familiar that we use their names generically.

Adverse Advertising

People get their news mostly from TV, newspapers, the Internet, and the radio. When it comes to informing the public on goods and services, the news media can be an effective and powerful tool of communication. When a new product comes out, like the latest car, gadget, or toy, the news media will likely discuss it, providing another form of free advertising.

News stories also alert the public to defects, dangers, and recalls. This kind of negative exposure also influences consumers by getting them to avoid certain goods and services and to beware of dangers in general.

Producers Influencing Consumers

Consumers make the final choice in all purchases, but producers do not want to leave all of the deciding up to consumers. They want consumers to demand more goods and services, and they want consumers to choose their products over those offered by someone else. Producers try to influence what consumers think and do to increase demand for their products so they can beat out the competition.

Consumers are the driving force of the economy, but they cannot do it alone. Without producers, there would not be anything to consume. To have consumption, there needs to be production. That is why businesses are important.

Businesses come in all shapes and sizes, from small home businesses run by one person to large international corporations that employ thousands of people in dozens of countries.

In many ways, businesses are like consumers. But there are important differences too. You will study some of these key differences and learn more about the role of businesses in the economic system.

Producers make all kinds of economic decisions. Just like consumers, they use rational choice when they do. In fact, producers are often more likely than consumers to pay close attention to the rationality of their decisions.

Usually, there is a lot more risk for producers when it comes to decisions. As a result, producers have significant incentive to use cost-benefit analysis and other tools of financial management. If they do not make good decisions, they will not make money. If they do not make money, they will go out of business.

Producers try to be as rational as possible, so they can keep playing their role in the economy.

Producers and Rational Choice

Remember that rational choice is a decision-making process that compares the benefits and costs of an action. Rational choice is a way of looking at several potential choices and deciding which choice is the best.

You have seen how consumers do this. Producers do the same thing, though there are some important differences. For one thing, businesses consider benefits and costs just as a consumer does, but only the monetary costs and benefits are relevant to their calculations. Consumers often take into account non-monetary things when doing cost-benefit analysis.

For instance, a farmer decides which crops to grow just like a consumer decides what to eat for dinner. But while the consumer might consider nonmonetary factors, the farmer is going to focus on monetary considerations.

Consumers might think about what is cost-effective when planning dinner, but they probably also prioritize nonmonetary considerations, such as what they like to eat or how healthy the food is.

Farmers do not think about what they like to eat when deciding which crops to grow. A farmer’s food preference does not affect production decisions. What farmers do pay attention to is how much money it will cost to plant various crops and how much they can expect to earn by selling those crops. Whichever crop will have the highest expected return is the crop the farmer will plant. It is the rational choice in monetary terms.

Profit

Monetary calculations are central to any producer’s decision-making process because making money is the reason businesses exist in the first place. In a market economy, businesses are free to make as much money as they can.

To make a profit, a business must have more revenue than costs. This means a business must earn more from the sale of its goods and services than it spends producing those goods and services. Here’s a simple formula that shows how to calculate profit:

Revenue – Costs = Profit

Profit is often called «the bottom line» because it is at the bottom of the calculation. The calculation of profit can be a bit more involved than simply subtracting costs from revenue. There are different types of expenses – production costs, administrative costs, taxes, and so on – that are calculated and subtracted in different ways.

For example, imagine a lemonade stand that rings up $30 in sales on a particularly hot day. Making and distributing the lemonade cost $7. You can calculate profits with a simple equation:

$30 (revenue) – $7 (costs) = $23 (profit)

The lemonade stand made $23 profit.

The Profit Motive

Making profit is not just something businesses like to do. It is something they have to do.

Every producer must make a profit in order to remain in business. Without profits, businesses disappear. This gives producers the profit motive, which tells them that they have to minimize costs and maximize monetary benefits. This is not exactly a law of economics, but it is so universally followed that it might as well be.

The profit motive is a necessity. Producers who choose to ignore profit end up going out of business. Only those businesses that have the profit motive will remain in business. You can easily say that all businesses are driven by the profit motive because they do not have any other choice.

Profits and Losses

A free-market economy is driven by businesses’ desire to make a profit. Businesses make production, pricing, and hiring decisions based on that goal. A business that keeps costs low and brings in more money than it spends makes a profit.

If costs and revenues are equal, the business is just breaking even. And when costs are higher than revenue the business is running at a loss. A business can break even or run at a loss for only so long before going out of business.

Even when a company is making a profit, the profit motive is an incentive. Because of competition, there can be pressure to make greater profits the next year. When other companies are increasing their profits, a business can fall behind even if its revenues are above its costs.

Imagine that you own a small bakery. You manage to sell enough cakes, rills, and doughnuts so that your revenues are greater than your costs. You can pay the rent, buy supplies, and pay your employees, and still earn a profit at the end of each month.

But what if your rent goes up? To break even at the end of the month, you increase the price of your goods. In this case, your revenues are equal to your costs. You are not making a profit, but you can continue with your business.

If you want to continue making a profit at the end of the month, you have to increase the price of your goods even more. Unfortunately, your customers might choose to stop buying your baked goods. In this case, you experience an economic loss because your costs are greater than your revenues.

The profit motive drives businesses to do two things:

– Reduce costs whenever possible

– Increase sales whenever possible

Inputs and Outputs

Profit is revenue minus cost. Simple. But what brings in revenue? And what counts as cost?

Revenue is all of the money a business brings in by selling its goods and services. In other words, it is the money derived from its output. For a business to have output, it needs input.

Inputs are what go into production. They can include the land, labor, and capital that are needed to produce any good or service.

Inputs cost money such as wages for workers, rent for land or capital for raw materials and equipment. They involve monetary costs for businesses. A producer’s costs account for all of the inputs necessary for production.

Opportunity Costs

Because profit dominates a producer’s thinking, businesses have to pay close attention to inputs and outputs. This involves making rational production decisions.

Consumers consider opportunity costs to make rational decisions. Businesses do the same. Remember that this is the cost of opportunities that are passed up when deciding to do one thing instead of another.

Business decisions about opportunity costs involve determining inputs and outputs. For example, if you have decided to open a bicycle factory, you have to decide what kinds of bicycles to make. You also have to decide what to use to make your bikes. Say you decide to make aluminum mountain bikes. The opportunity cost of that decision is what you could earn making steel mountain bikes, aluminum children’s bikes, or any of the various combinations available.

Production Possibilities Frontier

Businesses do not just try to guess about opportunity costs. Guesses are often wrong, and wrong answers lead to losses, not profits. Producers need a better tool of analysis. One tool is the production possibilities frontier, also known as the PPF.

A production possibilities frontier is a graph that shows producers how to set up production in an efficient manner. Efficient production allows a producer to maximize profit.

Production Possibilities Frontier

Businesses do not just try to guess about opportunity costs. Guesses are often wrong, and wrong answers lead to losses, not profits. Producers need a better tool of analysis. One tool is the production possibilities frontier, also known as the PPF.

A production possibilities frontier is a graph that shows producers how to set up production in an efficient manner. Efficient production allows a producer to maximize profit.

Working With the PPF

This graph represents the PPF of a bicycle-making business. The red line shows how many of each bike can be made with the inputs available, such as workers, aluminum, plastic, and other supplies in the factory. The points A, B, and C represent the points at which production of mountain bikes and racing bikes is the most efficient.

This table shows when production is the most efficient. Points A, B, and C show some of the many possibilities of producing bicycles where production is maximized. A maximum of 150 racing bikes and 200 mountain bikes can be produced given the set of inputs available.

Let us a look at that PPF graph again for an example of inefficient production. Point X shows an inefficient use of inputs. By making only 100 of each bike, the available workers and materials are not being used efficiently. No producer would want to choose a level of output that falls below the PPF. As long as the points of production stay on the red line, production is maximized.

How can you decide whether A, B, or C – or any other point on the PPF – is the best one? They are all equally efficient. However, unless mountain bikes and racing bikes sell for the same amount, one decision could lead to more revenue than another. To make a fully rational decision, the prices for each bike must be taken into consideration. The PPF cannot predict price so its usefulness is limited, but it is

still an important tool for creating efficient production.

Market Research

The PPF shows a producer how to maximize efficiency, but there is more to making a rational decision than efficiency. Getting the most output from your inputs – productive efficiency – gives you the possibility of maximum revenue with minimum cost.

Consider the previous example. The PPF tells us that any of the three mixes of production will be efficient.

But which one will generate the greatest revenue? Rational choice always requires information. To get this kind of information, producers do market research.

Producers can decide which type of efficient production will also be profit-maximizing production by

– Researching the price of competing goods in the market.

– Finding out what consumers are willing to pay.

– Determining whether consumers want or need what is being offered.

Getting the Profit Motive

Profits drive producers. After all, making a profit is the reason people start a business in the first place. Producers make decisions that are aimed at maximizing efficiency and profits. Making these decisions requires a lot of information about production and the potential market.

In a free-market system, producers are free to make decisions. This freedom creates competition among businesses as they pursue the same goal of selling goods or services.

A typical example of competition is the long-running contest between soda products Coca-Cola and Pepsi. The two companies that produce these popular beverages have engaged in direct competition with each other for over 100 years. Of course, there are lots of other drinks available, too, and Coke and Pepsi compete against all the available options for the biggest share of the multibillion dollar soda market.

Businesses want as big a share as possible in order to maximize profit. They clash in the free market to get consumers to purchase their goods and services instead of those offered by their rivals. Competition pushes businesses to be as efficient as possible so they can offer the lowest prices. It also drives them to develop new products and services in order to keep attracting new customers.

In a free-market system, producers are free to make decisions. This freedom creates competition among businesses as they pursue the same goal of selling goods or services.

A typical example of competition is the long-running contest between soda products Coca-Cola and Pepsi. The two companies that produce these popular beverages have engaged in direct competition with each other for over 100 years. Of course, there are lots of other drinks available, too, and Coke and Pepsi compete against all the available options for the biggest share of the multibillion dollar soda market.

Businesses want as big a share as possible in order to maximize profit. They clash in the free market to get consumers to purchase their goods and services instead of those offered by their rivals. Competition pushes businesses to be as efficient as possible so they can offer the lowest prices. It also drives them to develop new products and services in order to keep attracting new customers.

What Kind of Competition?

Competition is a clash of rivals pursuing the same goal, but not all competitions are the same. The way rivals compete depends on their goals and the number of competitors.

In a football game, for instance, two teams compete to score the most points. In a 100-meter race, on the other hand, there might be as many as nine runners competing against each other, and also the clock. While there is no victory for finishing in second place in a football game, in a foot race there is. You may not be the very fastest if you place second or even third, but you have beaten many competitors.

Businesses compete to make as much profit as possible. The amount of profit they can make depends on the kind of competition they face. The nature of competition faced by different businesses in different markets is known as the market structure.

Different markets are like different sports. The nature of the competition depends on the number of competitors. The competitors are always trying to maximize revenue and profit, but the number of other businesses selling the same things varies.

Economic competition comes in two different types: competition among the few and competition among the many. In a market with only a few producers making a specific thing, each producer has some control over the price. The distinction between a few producers and many producers tells us about the basic market structure.

But we can be even more specific about the types of competition. One extreme type of market structure is called a monopoly. When only a single producer sells a good or service, there is no competition at all. That is a monopoly. In a monopoly, the consumer is stuck with whatever decisions the producer makes, because there is no rival product to choose.

Oligopoly is another market structure characterized by few sellers. There are more producers than in a monopoly, but the range of businesses is very limited, and consumers have to choose from a short list of providers. Oligopoly offers some competition, but producers do not have to worry very much about competition.

At the other end of the spectrum of market structures is pure competition. In a purely competitive market, there are numerous businesses, and there is a wide variety of products sold. In a purely competitive market, consumers have a wide range of choices, and producers have to find ways to beat out their rivals. All this competition results in a lot of innovation, incentives to be efficient, and lower prices.

Pure Competition

The market structure that works best for consumers is pure competition. Pure competition is an ideal market structure that does not actually exist anywhere in the real world. We can, however, use pure competition as a standard for analyzing the market structures that do exist.

A purely competitive market has

– A large number of small businesses.

– Identical or easily substituted products.

– Freedom of entry into and exit out of the industry.

– Perfect knowledge of prices and technology.

Even though pure competition does not actually exist in the real world, there are places where it is close. The company eBay, an online retailer, created a marketplace on the Internet that functions with a market structure that comes quite close to pure competition.

Consumers can buy almost anything on eBay in a pure competition market structure. Pure competition exists when identical products are sold.

The sellers or producers on eBay set a minimum price for their goods. The consumer can then bid for the goods of his or her choosing. In this case, we have pure competition because everyone has perfect knowledge of the prices set.

Monopoly

Pure competition and monopoly are two extreme types of market structure.

While pure competition allows for perfect competition among a large number of sellers, a monopoly creates a total lack of competition. The monopoly has complete control over its market. This gives the producer complete control over what products to provide and what prices to charge.

The characteristics of a monopoly are

– A single producer.

– A unique product with no close substitutes.

– A price controlled by the producer.

– Entry is blocked to competitors.

The Near Monopoly

A pure monopoly is nearly as rare as pure competition. Most actual monopolies, such as a city’s utility provider, are heavily regulated by the government.

But there are some companies that control a particular market so thoroughly that they come close to creating a monopoly.

Microsoft is one of these near monopolies. While Microsoft is not a monopoly by definition – Apple also creates operating-system software – Microsoft dominates the market so effectively that it has been accused of acting like a monopoly.

The Microsoft Monopoly