Discuss and post your hypothesis of why the price of Nike running shoes cost more to sell than to produce now that you have seen the breakdown of the costs of production.

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Discussion 10.1: Monopoly in Your Everyday Life

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While referring to the “EYE on YOUR LIFE” section on page 425 of the textbook, think about situations and markets which meet the characteristics of a monopoly, i.e., no close substitutes and a barrier to entry exist. Also make note of the natural monopoly example in the textbook illustrating how one electric power distributor can meet the market demand for electricity at a lower cost than two or more could. If two or more distributors were in the market, imagine the technical difficulties that may occur if two or more sets of wires were needed in your home just to choose your electric power supplier. This example demonstrates how one electric power distributor may meet the entire market demand at a lower average total cost which subsequently leads to the development of a monopoly market.

Discuss and post your hypothesis regarding the extent of such economic conditions which are the result of the free market. Describe what role, if any, should government play when a monopoly arises. If it is the result of a natural blending in a free market, then is it equitable or efficient for the government to intervene? Should government regulate a natural monopoly when the industry or firm raises the price above the competitive price and produces too little? Is it fair for consumers to pay the higher prices? Should more industries and firms be deregulated? For example, what were the benefits to the markets when Cable TV was deregulated in 1984, re-regulated in 1992, and deregulated again in 1996? Justify your statements and respond to the statements made by your fellow classmates.

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Discussion 10.2: Some Selling Costs You Pay

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While referring to the “EYE on YOUR LIFE” section on page 448 of the textbook, here’s your opportunity to reflect back on the methods and theories you have learned in the last two lesson plans. Your grasp and comprehension of the models of perfect competition and monopoly are beneficial since the real-world situation of monopolistic competition is a mixture of both extremes. In other words, the methods and theories covered in the last two lesson plans lives and functions in the middle-ground of monopolistic competition.

When you buy a new pair of Nike running shoes, you’re paying costs ranging from the materials, cost of labor, shipping, import duty, sales, distribution, administration, R&D, advertising, sales clerk’s wages, and shop rental space. Almost everything you buy includes a selling cost component which exceeds one-half of the total costs. Your clothing, food, DVD’s, and your textbook for this course cost more to sell than they cost to produce.

Discuss and post your hypothesis of why the price of Nike running shoes cost more to sell than to produce now that you have seen the breakdown of the costs of production. Does knowing how much of the purchase price goes towards selling the running shoe cause you to rethink your buying habits for all brands of running shoes? It is important to understand that none of these costs are “useless.” For instance, the $5.00 paid by Nike for “sales, distribution, and administration” is a necessary cost or else the shoes would pile up on the dock once they were imported. Similarly, Nike’s $4.00 for advertising is necessary to provide consumers with precise information about their product.

Discuss the elasticity of demand and the profit-maximizing potential when a firm utilizes advertising to sell their product. What happens to the average total cost curve? What happens to the marginal cost curve? Is the demand for the product much more elastic?

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