204_summer_2009_lecture_5

204_summer_2009_lecture_5 - University of Toronto...

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Unformatted text preview: University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 5 1 Ajaz Hussain. Department of Economics Last Time Modeling some preferences Utility maximization problem (UMP) Optimal choice & Sensitivity analysis Cobb Douglas utility function Complements utility function Perfect substitutes utility function Please review Lecture 4 for UMP, optimal choices and characteristics 2 Ajaz Hussain. Department of Economics Today Perfect substitutes preferences: applications An explanation and implications for perfect competition 3 mini case studies Incentives: applications Nave marketing Treating addiction Rational teenage sex drive Subsidized education Declining population growth rates Inter temporal consumption The real interest rate Ajaz Hussain. Department of Economics 3 Perfect Substitutes UMP Ajaz Hussain. Department of Economics 4 Q 2 Q 1 P 1 > P 2 P 1 < P 2 Q 2 Q 1 Slope = 1 Slope = 1 Optimal Choices when P 1 > P 2 Q 1 = 0 Q 2 = Y/P 2 Optimal Choices when P 1 < P 2 Q 1 = Y/P 1 Q 2 = 0 U = Q 1 + Q 2 Perfect Competition Explained From ECO 100, in perfect competition demand curve facing firm is horizontal Why? How do perfect substitutes explain perfect competition? How is this explanation different from ECO 100? Lessons for Business? Ajaz Hussain. Department of Economics 5 P Q Demand Perfect Competition: an Explanation Ajaz Hussain. Department of Economics 6 2 Q 1 Slope = 1 P 1 = P 2 In theory, how much of each good will consumer purchase? According to this view, will any firm have a dominant market share? Yet .. explain why Amazon.com & Zappos.com are successful See Economist article on zappos.com Optimal choices when P 1 = P 2 Q 1 = [0 , Y/P 1 ] Q 2 = [0, Y/P 2 ] Case Analysis: Fuji , Kodak Film In 1993: U.S. unit market shares: Kodak 70%, Fuji 11% U.S unit market growth rates: Kodak 3%, Fuji 15% Source: HBS Case Eastman Kodak Company: Funtime film Kodaks flagship brand Gold Plus priced 17% > than Fuji Justification for higher price: Kodak a superior film (Still) Advertised as: Why trust special moments to less than Kodak film? C onsumer Report found little difference between Kodak & Fuji. Customers: tend to view film as a commodity Evaluate Kodaks price premium over other brands Ajaz Hussain. Department of Economics 7 Fuji Kodak & Fuji Consumer Preferences before Commoditization Kodak 8 Ajaz Hussain. Department of Economics Fuji Kodak & Fuji Consumer Preferences after Commoditization Kodak 9 Ajaz Hussain. Department of Economics Mini Cases: Coffee and Tires Starbucks & McDonalds Why was Starbucks successful?...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto- Toronto.

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204_summer_2009_lecture_5 - University of Toronto...

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