It says that as successive increments of a variable resource are added to a marginal cost, the marginal product of the variable resource will eventually decline.

Diminishing marginal returns in the long-run horizon factors of production can be changed including buildings, size and number of plants and others which means that the fixed cost becomes a variable cost.

Diminishing marginal returns is a short -run horizon phenomena caused by fixed of at least two factor of production such as land, plant, building, and machineries

The diminishing marginal productivity means that the marginal cost is decreasing, and the decreasing marginal cost leads to increasing average costs that will result to decreasing profit.

a.    Constant returns to scale mean that the long-run average costs are constant or does not change in relation to the output. A certain increase in inputs will have same increase in output.

Diseconomies of scope means that the long-run average costs rise. it is an increase in all inputs, let us say 15%, that will result to a greater than proportionate increase in output, let us consider less than 15%. It may occur at a very large output.

Economies of scope means that long run average cost falls, if all inputs are increased at the same proportion, output may increase by a larger proportion than the increase in input due to some factors that may lead to lower average costs.

a.    Economies of scope between two products occur if the cost of producing two products jointly is less than the cost of producing those two products separately:

Diseconomies of scope between two products occur if the cost of producing two products jointly is lower than the cost of producing them separately:

After acquiring a substitute good, raise price on both goods but raise price more on the more elastic (low margin) product. After acquisition, it is advantageous to cut output or increase price.

a.    After acquiring a complementary good, reduce price on both products to increase profit.

If promotional expenditures make demand less price elastic, then reduce price when promoting the product

If promotional expenditures make demand less price elastic, then increase price when promoting the product.

If MR > MC at capacity, then set price to fill available capacity

With MR > MC managers consider increasing price to sell more but cannot do so because the firm’s capacity is limited, so firms sell as much as it can or set price to fill capacity.

If the cost of overpricing (unused capacity) is larger than the cost of underpricing (lower margins), then price higher than would fill capacity, or price otherwise (vice versa)

As implied in the property theory, consumers are motivated by a comparison of the price level to the reference price (how much we expect something to cost) not by the actual price level.

consumers are loss averse which means losses are felt more intensely than gains. A price increase will be felt more intensely (consumer loses) than price reduction (consumer gains).

Managing price expectations is as important as managing price.

Integrate losses but separate gains

Price discrimination is charging higher prices for less-price sensitive buyers or charging lower prices for more price-sensitive buyers.

low value buyers is a good reason to sell at a higher price to consumers who otherwise will not purchase at the low price.

In direct price discrimination, the scheme is done if you can identify the low-value buyers from the high-value buyers and prevent them from reselling the lower-priced goods to high-value buyers (arbitrage).

in indirect price discrimination, the two groups cannot be identified perfectly and there is no arbitrage so finding indirect methods of setting different marginal cost becomes the alternative.

To discriminate directly, different group of buyers with different elasticities should be identified. Then set optimal price for each group: charge higher price to the buyer group with the more elastic demand, and a lower price to the group with less elastic based on the pricing formula.

With direct price discrimination, you will also simultaneously create an incentive for the low-elasticity group to try to purchase at the lower prices offered to high-elasticity group. If too many customers can do this, then they can make the price discrimination scheme profitable.

The marginal cost of selling to the two different groups can be different, MC1 is equal to MC2. But, if the price elasticities differ, pricing is still be determined, in part, by differences in elasticity.

In a direct discrimination, seller cannot identify perfectly identify the two groups or cannot prevent arbitrage, so seller must find indirect methods of setting different prices to the different group.

When seller cannot directly identify who has low or high value, the seller can still discriminate by designing products or services that appeal to different consumer groups.

Indifferent price discrimination requires identifying some feature that corresponds with value, and then designing products that differ along this feature.

Offer volume discounts. As more units sold decrease price example. First good price at 7, second good at 6, third goods at 5, and so on.

MODIFIED T OR F: Use two-part pricing (fixed price plus a per unit price. Charge a per unit price high enough to consummate all wealth creating transactions (setting it at MC=1.50).

MODIFIED T OR F: Important lesson in pricing:  when bargaining with a customer, do not bargain over unit price; instead, bargain over the bundled price.

Economies of scope = Cost (Q1, Q2) < Cost(Q1) + Cost (Q2)