Home Random Page


CATEGORIES:

BiologyChemistryConstructionCultureEcologyEconomyElectronicsFinanceGeographyHistoryInformaticsLawMathematicsMechanicsMedicineOtherPedagogyPhilosophyPhysicsPolicyPsychologySociologySportTourism






Price discrimination

Surplus

In a free market, price is decided by the laws of supply and demand. The market price is the price that sellers are happy to take and consumers are happy to pay. It's a compromise, but in the end everyone is happy, right? Well, not quite everyone. Some sellers will think the market price is not a good enough reward for their efforts. They will continue to sell at a higher price, even if almost no one walks through their shop door. Similarly, some people will walk away from the market, moaning about the price and refusing to pay. You can't please everyone!

However, there will be some people who are more than happy with the market price. What makes them so cheerful? These are the people who had expected to pay a higher price, but found that the market price was actually lower. These people feel that, by paying the market price, they have got a bargain. In the jargon of economics, they have got consumer surplus. Consumer surplus is the difference between the price consumers are prepared to pay and the price they really do pay.

The idea of consumer surplus is shown in figure B l on page 47. M is the market price. You can see that the demand line carries on above the market price. This means that there are consumers who are prepared to pay above the market price.

Each of these consumers will gain a different amount of consumer surplus by paying the market price. Together, all the surplus they gain is called the aggregate consumer surplus. This is the grey area shown in figure 1.

Consumers aren't the only ones who enjoy surplus. There is producer surplus, too. Remember that the law of supply says supply rises as price rises. This is because smaller amounts cost less to produce than larger amounts. For this reason, producers would have been happy to sell some of their output below market price. However, once the market price is set, they can sell all their produce at that price.

Think about wine producers for example. The first 50 litres of their wine cost two euros per litre to produce. The next 50 litres cost three euros per litre to produce. At the market, however, they can sell all their wine at the price of three euros per litre. The extra money they make on the first 50 litres is the producer surplus. The higher the market price is, the bigger the producer surplus will be. The total is called the aggregate producer surplus. This is the pink area in figure 1.

Surplus is an important concept. In one way it is a measure of the utility that consumers gain from their purchase. It is also a measure of the profit that producers make. Moreover, consumer and producer surplus together are a measure of the benefit everyone gains from the economic transaction. In economist jargon, surplus is a measure of economic welfare.


Price discrimination

The market price for a product is like a signpost for companies. It shows them more or less what people are prepared to pay. Nevertheless, companies can set their prices just above or just below the market price if they want. They can even choose to ignore the market price completely. In the real world of business, setting prices involves skill, guesswork and risk-taking. Companies have lots of pricing tricks which help to increase profits. One of these tricks is price discrimination.



Price discrimination means charging a different price for the same product to different customers. For example, you walk into a shop and buy a CD for ˆ15. A few minutes later, I walk into the same shop and buy another copy of exactly the same CD. This time, the shopkeeper charges me ˆ20! That's price discrimination.

There are different types, or degrees, of price discrimination. First degree price discrimination is when almost every consumer pays a different price for the same product. How can this happen? Remember that the demand curve slopes downward. In theory, every consumer has their own point on the curve. In other words, each person values the product differently. You may think that an Elton John CD is worth ˆ20, whereas I think it's only worth 50 cents! We are on different points on the demand curve. With first degree discrimination, each consumer will pay what he or she thinks the product is worth, and sellers charge each person accordingly.

This all sounds great, but it is not usually practical in the real market place. Nevertheless, it is sometimes possible. An auction, for example, works in this way. In an auction, each consumer makes a bid for the product, and the highest bid wins. In this way, the product is sold at a price that the buyer thinks is right. Auctioning is becoming more and more common on the World Wide Web, and auctioning websites have become very big business.

Second degree price discrimination is more common than first degree discrimination. It involves changing price according to how much of the product is sold. For example, if a customer buys three pencils, they pay one euro per pencil. If they buy 300 pencils, they pay only 75 cents per pencil. This is a kind of reward for buying large amounts. This kind of discrimination is important for retailers. It allows shopkeepers to buy goods in bulk from wholesalers at lower prices. Shopkeepers then add a markup price when they sell the goods on to ordinary customers.

What about third degree price discrimination? This is when certain types of customer are charged different prices. For example, pensioners and students often get discounts on public transport or for arts events. These people cannot afford the normal market price. By offering discounts, companies widen their market share but still make a profit.


Welfare economics

Behind the numbers, charts and formulas of economics, there are people. This is sometimes easy to forget. Economics isn't only about profits, losses and utility. It's about society. Economic ideas and theories often seem to be issues that are far removed from people's everyday lives. Welfare economics, however, tries to correct this. It looks at how economic policies affect society, families and the individual.

One of the big issues in welfare economics is equity. Equity means fairness, and welfare economists are interested in measuring how fair our economic systems are. One way they do this is to look at how income and wealth arc distributed among the population. Welfare economists also investigate the effects of government policy on equity.

Governments' main weapon to fight inequity (unfairness) is taxation. Welfare economists try to find out how taxation affects vertical equity and horizontal equity, which are two ideas that taxation systems can be based on. The idea behind vertical equity is that people with more income will pay more than those with less income. The idea behind horizontal equity is that people with the same income will pay the same amount of tax. Ideally, a tax system will have both vertical and horizontal equity.

However, some economists feel that any kind of taxation on people's earnings is unjust. They believe it is unfair to penalise entrepreneurs and hard-workers. Why should people who are less able or less hard-working be supported by others? In this view of welfare economics, inequity is a natural feature of every economic system. Trying to create equity, they say, is just a waste of time. Instead, it is better to make economic systems more efficient. A more efficient economy grows faster and everyone in society benefits.

Welfare economics isn't only about the fairness of economic systems. It's also about the impact that economic choices have on our lives. Economic transactions often affect other people who are not directly involved in those transactions. Economists call these results externalities. Externalities are sometimes good and sometimes bad for society. For example, pollution is a negative externality of the car industry. But cars give people better mobility, which is a positive externality of the same industry.

Production is not the only cause of negative externalities for society. Many are due to our use or consumption of goods. People's litter in parks and on beaches is one example; noisy neighbours playing their CD player loudly is another. These are both examples of externalities causing pollution. However, health problems from smoking and drinking alcohol are also externalities from economic transactions. These have a cost for individuals, but also for society as a whole.



Date: 2015-12-24; view: 5806


<== previous page | next page ==>
I. Beantworten Sie die folgenden Fragen. | Government revenue and spending
doclecture.net - lectures - 2014-2024 year. Copyright infringement or personal data (0.006 sec.)