Inferior Markets Explained: Markets Which Rely on a Bad Economy

Sometimes, it is easy to assume that the demand of all goods and services will be increased as the economy improves, and that everybody can benefit from a good economy, but this is not true. There are many products, services, and markets that thrive under poor market conditions. These products are often referred to as "inferior" goods and services. An inferior good is a good for which demand DECREASES when income of a potential consumer increases and demand increases when income of a potential consumer decreases. Meaning that, in essence, when a potential consumer is “poorer”, they’ll buy more, but when they’re “richer”, they’ll buy less. At first, this does not make intuitive sense, right? But think about a kid in college. Because they are allocated a limited amount of money, they are forced buy more cup of noodles because of their budget. But, as that college student goes out into the labor force and starts earning more money, there are high chances they would start buying steak rather than noodles. Contrary to this, a normal good is a good of which you buy more of as a potential consumer's budget increases. For example, caviar (assuming you enjoy eating it) is a normal good. As your income increases, you will buy more caviar.


As seen with the cup of noodles, there are actually markets which are based around the assumption that a nation's economy will not increase beyond a certain point. For example, stores like Wal-Mart advertise the phrase "Save Money, Live Better". They have built their brands for years around a cheap, budget store. They're assuming the need for these items will last, and that all of a sudden the majority of consumers will no longer seek glamour and luxury.

Once again:

Inferior good: a good for which demand DECREASES when income of a potential consumer increases and demand INCREASES when income of a potential consumer decreases
Normal good: a good for which demand INCREASES when income of a potential consumer increases and demand DECREASES when income of a potential consumer decreases

©2011. All rights reserved.

Fiscal Policy Vs Monetary Policy

Once in a while pundits and gurus in the media discuss fiscal policy and the management of the US economy, and as a student of business in my early years I assumed that was the same as monetary policy. Now I know better - In essence, monetary policies are directed by a central bank, and fiscal policies come from the authority of a country's national government.

Fiscal Policy:

Simply stated, "Fiscal Policy" is defined as the governments ability to inflence the overall economy via expenditure and revenue collection. The government can spend more or less, and the government can increase or decrease taxes (revenues), borrow money, and sell fixed assets like government-owned land. Both of these "fiscal manipulations" (expenditure and revenue collection) can affect:

- "Aggregate Demand" - which is the total demand for goods and services at a point in time and a specific price level
- How resources are allocated within the economy
- How income is distributed among the population.

Fiscal policy can curb inflation, increase unemployment, and can maintain a proper (healthy) value of money.
Incidentally, John Maynard Keynes is widely credited to be the "Father" of fiscal policy.

Monetary Policy

"Monetary Policy" is more focused on the actual supply of money and targeting interest rates to grow and stabilize the economy. Monetary policy can either be referred to as expansionary or contractionary. Expansionary policy increases the total money supply more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even reduces it. In the US, the Federal Reserve system is the institution which is tasked with executing monetary policy. Othe "Central Banks" around the world are The Bank of England, the European Central Bank, , The People's Bank of China

Monetary policy can affect a number of economic factors, including:

- Economic Growth
- Inflation
- Exchange Rates with other currencies
- Unemployment

Monetary Policy has its roots in ancient China and other history, but one of the biggest "proponents" of Monetary Policy as a powerful tool in managing economy was Milton Friedman.

©2011. All rights reserved.

How Do Companies Set A Price For Their Products?

On vacation a few years back, I traveled with a group of friends and family to a foreign country.

While my family and I seemed somewhat local, the people we traveled with were clearly tourists. One day, all of us went out to dinner, and each of us were handed menus. Later, when I caught a glimpse of our friends’ menu who were sitting at another table, I was shocked to see that we were being charged two different prices for the same foods. The manager intentionally charged for the food according to how much he believed would make him the most money. Analyzing the situation now
with a much different perspective than I had viewed it with many years ago, I realize the restaurant manager must have found an effective price-point for the classifications he grouped us in. Clearly, he acknowledged charging everybody lots of money simply did not work, and, though unethical, his actions made me wonder about the practice.

This brought me to an interesting question: how do companies set the price of an item? In order to maximize profits, they must find an exact price at which the worth of the product or service becomes valuable enough for a consumer to buy. So what determines the price at which profits are highest, especially considering each individual has their own opinion as to the “ideal price”?

As any economics course would teach on day one, the intersection between the supply and demand curve determines equilibrium quantity and price, but what are some of the tools a company can use to determine where this intersection may be?

The answer obviously is different for different industries. In the case of Boeing, factors like fuel prices and growth of emerging markets and currency exchange rates factor heavily in pricing their products (planes and plane parts). However, in the case of the local pizza shop the pricing may be much less scientific but just as relevant to the long term success of the business.

Some of the tools that industries use to price their products are:
- Market Research / surveys (opinion)
- Market Research - Conjoint Analysis (examines the direct trade-ofs
among competing products)
- Market Research - perceptual mapping - assesses the benefits of
various products that may not be direct substitutes for one another,
and seeks to identify the benefit of one product that no other product
offers.
- Competitive Analysis (what is the other guy doing, price-wise ?)
- Historical Trend analysis (where is the price of this product most
likely to go)
- Purely quantitative materials costing (what does it cost me, and
what kind of premium should I be getting? AKA Floor pricing)
- Use a Life Cycle Strategy - Price a product for early adopters to
take advantage of its extra value early, then plan to reduce the price
later on for increased market share.

The science behind some of these techniques is astoundingly sophisticated, and I know for a fact that some industries spend millions on pricing their inventory, including Television Companies (price of Advertising), Pharmaceutical Companies (price of medications in line with Insurance Company expectations), and even Chocolate Manufacturers

Other factors also affect the ultimate price of a product:
- Speculation (Oil prices are affected by the perceived lack of
inventory in the future)
- Coolness Factor (Apple products are sold at a solid premium because
they are cool)
- Political Climate (fluctuations in the currency of a country that
produces a certain product will affect the price)
- Fluctuating Weather (especially for produce, etc)
- Artificial control of world supply (diamonds)

©2011. All rights reserved.

Price of gasoline in America is approximately 2000% (thousand!) higher than the price of gasoline in Venezuela. What accounts for this gap?

Is the nostalgia associated with print books powerful enough to stifle the uprising of e-books?

Recently, I read a very interesting article which stated that “E-books now outsell print books” (http://www.computerworld.com/s/article/9216869/Amazon_E_books_now_outsell_print_books?taxonomyId=77) . This fascinating transition from print books to e-books marks a huge movement away from the traditional method of reading that’s been used for so much time in history. This big of a shift away from an established method must be due to a significant technological advance, especially considering print books have been conventional entity— and the process of printing books is hardly one that has been modified over the years. Let’s take a look at the pros and cons of E-books vs. Print Books, and consider the reasons which e-books have been popularized.




In conclusion, many of the positives of print books are a result of the “nostalgia” which many feel in turning pages and holding a binded book. While print books are certainly still prominent in society, will society eventually turn to e-books? Please comment with your thoughts below.

©2011. All rights reserved.

How Large portion-sizes and Bringing Home Left-overs can potentially serve as a means of accelerating revenue for a Restaurant

Who doesn’t look forward to eating leftovers from last night’s big portion meal? In my opinion, while serving large portion-sizes and bringing home left-overs may seem like a benefit to only to the customer, I propose it can serve as a huge asset to the company too. In restaurants such as Cheesecake Factory, Maggianos, and T.G.I Fridays, customers can expect to come home with a bag full of delicious left-overs. When eating the leftovers the morning (or afternoon) after the dining experience, the customer relives the delicious food again the morning after. This forces a customer to not only enjoy the meal once, but to experience it twice, in two different atmospheres, at two different times. It makes economic sense for the restaurants to serve huge quantities and charge a few extra couple dollars for numerous reasons. While charging a customer an extra three dollars for a dish, and serving a three dollar out of restaurant pocket cost may seem somewhat ineffective , it is not. These large portion sizes add value of the meal in the minds of the customers, and also creates a more lasting impression. There is no denying that the food these aforementioned restaurants sell may be delicious, but no customer walks in these casual restaurants expecting a feeling of “gourmet”. Rather, customers expect an enjoyable atmosphere, friendly service, and their bellies to be filled. “Doggy-bags” serve as a way for middle-class restaurants to stand out from each other, because of their abilities to self-advertise and send some of the restaurant experience with the customer to enjoy a second time.

Does Apple Synthesize Supply and Demand?

Who can avoid the inevitable lines outside the Apple store when they release a new product? It has been well established that if Steve Jobs had his hands on a product, the world wants it. Consequently, when my Dad and my brother woke up at 6 am to buy our Ipad 2 the day after it came out, I wondered why avid lovers of Apple products have a difficult time obtaining the latest gadgets. I realized the power of Supply and Demand. The idea of Supply and Demand indicates the relationship between the amount of product available and the number of people willing to pay for that product. These two factors, as a result, affect the actual price of the product. I started considering the reasons that Apple, an established company and without a doubt household name, would not have enough of a product to stock on shelves when there was a recent release. Was it that the approval process was too lengthy and Apple wants to start sales or is it, perhaps, does Apple wants to exude an air of exclusivity? There are many possibilities, but my theory is that Apple wants create a sense of adventure in obtaining a new product. Maybe, if a company releases an abundance of the new products, a sense of excitement and “buzz” goes away.

Regardless of the reason, I continue to love Apple as a company, and I will undoubtedly continue to be a face in the “day after release” new product line crowd.

©2010. All rights reserved.