Risk

Certain decisions people make involve a degree of risk. Some decisions have great risk some have small. There is almost no risk when a pair of shoes are bought. You spend the money you think the shoes are worth, and you are not expecting to gain money back from the shoes. A lottery ticket has a great amount of risk, but can yield money if the ticket is a winner. The same goes with everyday life. Most people are not guaranteed a job tomorrow. Certain events may take place where the company may need to lay off people. The business may have to close down, or relocate. A degree of risk is involved when choosing an employer to work for.
Investing the money you make is also quite risky. You can choose to put the money you make in a savings account where the interest rate isn't much more than inflation. Another choice is the stock market or other business opportunities. One can invest in a business that is well established like Microsoft and gain return from it. There is still risks involved. Microsoft may do exceptionally well one moment, then do not so great another moment. High risk investments if they are successful yield the most. Starting a business or investing in a business that is just starting would earn more if it's successful than if the money was invested in a company that is already established. In this situation there is also much more risk involved.
a. Probability
If Joe Smith decides to start a software company out of his garage there are risks and probability. The odds are against Joe Smith, he only had an idea and a few thousand dollars he borrowed from a friend. Probability always had to add to one. Because software companies are very expensive to run and require a great amount of knowledge of technical ideas, the odds are very great against Joe Smith. The odds he will be successful in starting an established software company may be 1/100, and the odds that he will fail are 99/100.
b. Expected Value
The expected value is calculated by the probability of failure and the probability of success and put into an equation where the amount of money invested is calculated in. So in Joe Smith's friend's case the expected value=Pr(success)($2000)+Pr(failure)($0)=(1/100)(2000)+(99/100)($0).

Consumer Behavior

What makes a consumer make the decisions he/she makes? Many factors are involved when a consumer makes a decision to purchase or to save. Does the future look good? The consumer has to take in account if he/she will have a job in six months. Also, how does the government economy look? If there are many disasters then the consumer is more likely to save then spend. The consumer is thinking for the future and if the future is looking grim then he/she is more likely to save.
a. Consumer Preferences
Every consumer has preferences on what product he/she will purchase. Some people like foreign goods as opposed to domestic goods. Some people have brand loyalty, some people prefer rock music to classical music. There are many personal preferences that would influence a consumer while making a decision to purchase a good.
b. Budget Constraints
A factor that will influence a consumer on making a decision is whether or not he/she can afford the good. There may be a person who loves Lexus cars but simply cannot buy the car because it doesn't fit in the budget.
c. Consumer Choices
People will always purchase things that they think will make them happy. The choices the person makes must be in the boundaries of the budget and will be in the boundary of the consumer's preferences.

Marginal Utility and Coffee

Marginal utility the idea that the more the consumer receives is not necessarily better. More is not better in some situations, in fact sometimes less is more. Less coffee would amount to more satisfaction in some situations. A person may drink 5 cups of coffee against his/her will, or maybe drank on accident, or didn't know the consequences or large amounts of caffeine, now the person knows that he/she would be much more satisfied with one or at the most two cups of coffee. Marginal utility is the satisfaction a person receives from taking one more unit of the good. For coffee, the marginal utility is high from zero cups to one cup, and high as well from one cup to two cup. However, the marginal utility may diminish after the second cup. In fact the person may be dissatisfied with the third cup or fourth cup. This is where the idea of diminishing marginal utility.

Working at Starbucks I know about this first hand. I take note of the regulars who come in. They will order their first cup of brew early, and it couldn't be strong enough. Some come for a second, but it's mostly just a cup that will keep them alert until five o' clock. Some will even ask for "half-caf" or even "decaf" on the second cup. A rare few will ask for a third cup. At this point marginal utility is very low for most people.

Pie Slinging In Albuquerque

Friday, November 18, 2007
Being a pizza delivery driver for Pizza Hut for five years I am able to observe certain things that other people may not be able to see. First, I see what the customer sees from a different long run point of view – the price of pizza. The price of pizza has risen over the past five years by a significant percentage. When I was first hired in 2002, a large pizza with one topping was $10.29. Now a large one topping pizza is $13.59. Also five years ago there was a delivery charge of $0.80. The delivery charge has gone up to $1.65 since then.
There are several reasons for the increase in price. The first is inflation. Over five years inflation has not had too much affect on prices overall but it has had an affect none the less. Gas prices have gone up significantly in five years and it is the company’s responsibility to compensate the delivery drivers for gas and maintenance costs for their vehicles. In 2002 the average price of regular self-serve gas was $1.26. At the time we were even complaining about that price because a few month earlier in February of 2002 the average price was $1.12 in Albuquerque1. If we had known that in 2007 gas would be over $3 a gallon I’m sure there would have been less complaining. The increase in gas prices and the minimum wage increase brought the price of pizza and the deliver charge up. In 2002 newly hired employees were started at $5.15/hr. Now the minimum wage is $6.75. Prices in the store reacted quite quickly to the increase of the minimum wage. The majority of the employees working for Pizza hut received a significant pay raise. This was reflected almost immediately in a price increase of pizza. It's also fair to say that Pizza Hut's competitors raised prices at the same magnitude. Papa John's and Domino's also have a large percentage of there employees that are earning the minimum wage so when the wage was increased, they also raised their prices accordingly. For pizza hut, when the prices of pizza were raised a few dollars and the delivery charge was raised, it's safe to say there were less orders being placed – for a short time. The regular normal amount of orders would pick up again a few months after the price increases.
In Albuquerque, like most other cities in America there are three major pizza deliver choices: Pizza Hut, Dominoes, and Papa John’s. In Albuquerque, there are the major chain stores and there is also local competition like Brickyard Pizza, Homerun Pizza, and Pudge Bros. Pizza. The business for pizza delivery is highly competitive in Albuquerque especially in the university area where there is a high volume of pizza orders. If someone wants a large pizza with a two-liter drink delivered to their house, it’s going to cost about the same from the three chain stores. However, if you order from Pudge Brothers the price is significantly less and the pizza is larger and if you order from Brickyard Pizza the price is a bit higher. The reason for the price of these two company’s product being higher and lower than the market price is because Pudge Bros. doesn’t have as much influence on the market as Pizza Hut, Dominoes and Papa Johns and their product could be described as not as good or equal in quality. Pudge Bros. is a price taker. Brickyard Pizza offers a product that can be said to be superior to the chain restaurants’. Because many people see Brickyard’s pizza to be better, Brickyard can raise the price above the market price for pizza because people are willing to pay a little extra for a better quality. Brickyard doesn't have as much market power as the three chain stores, however.
If Brickyard were to lower its prices to $8 per pizza it wouldn't affect the market price of pizza in the city. If Papa John's, Pizza Hut and Domino's were to change their price of pizza it would affect the market price of pizza greater than it would if a smaller pizza place would. Still, if the price is set too high, there are substitutes. The substitutes however don't have as much pull in the market as the three large chains do. They don't have the customer base, advertising or capital to provide for the amount of consumers the three chains stores do. The market for pizza delivery would be placed between “monopolistic competition and “oligopoly” in the graph below. The reasons are:
There are three large stores that are in control of most of the market, but there are also smaller stores that offer substitutes.

The price of pizza is set by the three large pizza chains and what people are willing to pay for their pizza. The producer would like to operate where MC=MR. And because in many cases one pizza chain can be a substitute for another, the price for all three stores is about the same. If Domino's raises its prices and a consumer sees Papa John’s as a substitute then the consumer can easily buy from Papa John’s and be happy with the product while saving a little money.