Explain what is meant by the term ‘freeconomics’.
Freeconomics is a theory that was created by Anderson, and allows goods and services be provided for no cost to the consumers. The companies that cannot keep up with this, be taken out of the market.
How can firms afford to make goods and services available for free?
Anderson suggested that firms can use advertisements, “airline industry would have to learn from commercial TV, which allows viewers to watch for free while advertisers pay for access to them. It would also have learn from the internet, where websites make money for delivering click-through traffic to other sites.” Another example that Anderson gave was the Japanese photo-copying machine, and that if machine costed $10, and the other machine was free, but came with an advertisement at the back, the majority of the Japanese people would choose the free line. Also, the popularity of the internet has supports Andersons theory.
An example of this in Japan could be Softbank and other phone companies. A couple years ago, they have offered a plan that allowed phone calls from Softbank to Softbank phones that are free of charge (until a certain time of the day). This allows consumers to agree paying more monthly charges of the phone.
“Anderson’s idea is that the internet, by reducing marginal costs, encourages businesses to make their money by offering free goods or services to an extent we have not witnessed before”. Discuss the extent to which doing business over the internet reduces marginal costs.
As explained in the article, by reducing marginal costs encouraging businesses to make money by offering free goods, the changed supply will affect the demand. This is because free services such as Google and Skype is offered to this generation which expects things to be free. This generation is also open to downloading albums for free, which is illegal. Anderson says that the internet should be able to attract the maximum people, reaching a larger audience. “It’s not about the cost of the equipment in the racks at the data centre; it’s about what that equipment can do. And every year, like some sort of magic clockwork, it does more and more for less and less, bringing the marginal costs of technology in the units that we individuals consume closer to zero.” He says that this is freeconomics magic secret.
Using your knowledge of economics, draw 2 diagrams from microeconomics that help explain the concepts in this article.