1. Explain what is meant by the term ‘freeconomics’.

‘Freeconomics’ refers to a business model in which the consumer does not pay for the purchase or use of a good or service.

2. How can firms afford to make goods and services available for free?

Firms are able to lower marginal costs by a significant margin and still be able to make normal profits, and even abnormal profits, through other means, e.g. selling advertisement space to third-parties.

3. “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.

The internet gives firms the ability to lower marginal costs by lowering variable costs to a large extent. Much of this is due to the fact that most products on the internet exist as data in cyber space, stored in a hard-drive. They are distributed by allowing costumers to download copies of that information. Because of this, firms have no need to pay for the production costs of goods such as audio CDs. One of the few variable costs include labor, which in this case involves the maintenance of hardware or the development of software. Additionally, fixed costs are stretched extremely thin over large numbers of output, lowering marginal costs.

One increasingly popular business model is what made YouTube increasingly successful. YouTube is a video-streaming site which offers the service for free. However, the main product is not the service itself, but the content that users create and upload. Through this model, a great amount of a great variety of content is uploaded to the YouTube website, and YouTube does not have to pay costs to create content. Revenue is generated by offering ad space to third-parties in each video, one of which viewers are sometimes forced to watch before the video. Subsequently, CNN has attempted to create a user-created content by introducing iReport, where users are able to upload their own news stories.

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