1. Explain what is meant by the term ‘freeconomics’.
2. How can firms afford to make goods and services available for free?
Firms can afford to make goods and services available for free by reducing marginal costs or having other sources of income. Marginal costs are the cost of producing one extra unit for an item. An example of another source of income can be if there are advertisements and such that help the firm gain a profit. For example, Facebook is a free social networking site however the company still makes a lot of money. This happens because of the advertisements that are placed on the page. Facebook is used worldwide by people, so when other companies want to advertise their products, they pay Facebook to do so because those advertisements will be seen by many people. Since Facebook has personal information about each person and show the “likes”, the advertisements could appeal to specific people’s wants to advertise. Also, people can see how many of their other friends have “liked” a specific product and would be persuaded to buy it as well. This way, Facebook makes money from companies that want them to advertise their products and such for them, and those companies make money once consumers on Facebook have seen what they are selling. So, Facebook can afford to make its good and services for free because they are paid a lot of money by other companies to advertise their goods and services, thus making a profit. This is similar to the situations of other firms because they also have goods or services that are free but make profits from other things they provide.
There is an extent to which doing business over the Internet reduces marginal costs. This depends on other factors that can affect the company to have different outcomes in the long run or short run. In the short run, it can reduce marginal costs as it is electronic but in the long run, it could cause more competition to arise therefore causing the marginal cost to increase. An example of this is MEGAVIDEO, a server that provides movies and television shows for viewing. MEGAVIDEO allows 72 minutes of viewing for free, but after these minutes, you must pay or wait for another 72 minutes to view the rest of the movie or show. This is advantageous to the company because most movies go over the 72 minutes, so the people will get very frustrated with waiting to finish the movie, especially if they are on a very intense or important scene. Therefore, some may be willing to pay for the unlimited service so that they do not have a limited time to watch something, which will increase MEGAVIDEO’s marginal revenue. However, it may be disadvantageous providing 72 minutes free if the people are only watching shows on it because the episode will end before the 72 minutes, therefore they will not need unlimited access as it isn’t a bother to them.
The stakeholders of this are MEGAVIDEO, consumers, and competition. In the short run, MEGAVIDEO will be winners because they are making a profit. Also, they are reducing their marginal costs because they do not have to pay for packaging and such for the movies. They simply have to upload to the server, probably just once, and once it is on their server millions of people can watch it. Therefore, they are saving a lot of time because they do not have to upload a movie more than once. Also, in the short run, consumers will be winners because they can watch the first 72 minutes which is enough time to watch a 40 minute episode. However, if they want to watch a full movie and are not willing to pay for it on MEGAVIDEO, they always have other options to view movies.