1. What is a price taker? Discuss the assumptions that are made in order to obtain the perfectly competitive model.
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Our book defines a price taker as a perfectly competitive firm that must take the price of its product as given because the firm cannot influence its price (Miller). This is like having 3 soda machines with the exact same soda in them just with a different label, on machine has it for a dollar each another has it for 1.50 and the last has it for 2.00. Everybody knows that the sodas are all the same so they pick the 1.00 sodas, no other sodas are sold since the dollar machine has the lowest price, the other machines must lower their price to a dollar to be perfectly competitive, and this is called taking the price
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Even when not making any economic profit a firm is making an accounting profit, this is usually a good enough reason for the firm to operate permanently at this price especially when the market rate of return is equal to or less than the accounting profit of the business. If on the other hand the market rate of return is greater than the break-even price then the business is running at an economic loss. This would still look like a profit to an accountant.
Miller, R. (2012). Perfect Competition. In Economics Today The Micro View (16th ed., p. 515). Boston, MA: Pearson Addison-Wesley.
3. An upscale bistro in a small town charges higher prices for the same menu items at dinner time than at lunch time. Does the bistro necessarily practice price discrimination? Explain your answer.
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The bistro is not necessarily practicing price discrimination, I personally believe it would be price differentiation because the operating costs to run the bistro at dinner are most likely higher, and demand is higher. The operating costs are higher because of the staffing requirements for the dinner rush, more wait staff cooks and greeters are needed to handle the greater volume of diner patrons. If the customer and demand load is similar to the lunch time then they are practicing price
Topic A (oligopoly) - "The ' An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies.
Price discrimination can be defines as when a firm offers an “individual good at different prices to different consumers” The Library of Economics and Liberty elaborates on its pricing strategy, stating Comcast offers different pricing depending on what features the consumer desires. For instance, the cable company will charge a higher price to a person who uses several services as part of their cable package. Conversely, the firm charges a very low price to someone who would “otherwise not be interested” , providing basic services at a minimum price. It takes advantage of the regulation imposed on the cable industry by offering the required basic package at seemingly attractive prices. Using this pricing system allows for it to attract different consumers whose maximum price they are willing to pay differs. Recently, Comcast attempted a new billing strategy by introducing a data usage cap. It essentially expanded on the company’s existing price discrimination method by charging customers according to how much data they used each month. Comcast also utilizes penetration pricing, where it offers its product at low prices to attract new consumers, later raising the prices once the customer is subscribed for a certain amount of time. Generally it claims the original prices were promotional only, lasting only a small amount of
...e. A price gouger needs to charge more in order to avail the product or service. In the case of Raleigh, the roads to the town were not accessible due to fallen trees and rocks. An entrepreneur would need to cut the trees and remove the rocks in order to take the product there. People who do that need compensation for all the trouble they take to bring products to the market. The youths who brought ice to Raleigh town had to cut down trees in order to access town. Instead of selling ice as the “right price” of less than 2 dollars, the youths charged more than 8 dollars. The price provided just there right compensation for all their efforts. Banning price gouging led to serious suffering of the people because the little food left went bad causing even more losses. For a few dollars for the price of ice, Raleigh residents could have saved millions worth of food.
Predatory pricing “is alleged to occur when a firm sets a price for its product that is below some measure of cost and forfeits revenues in the short run to put competitors out of business” (Sheffet p.163-164). The reason firms take the short term loss is because they hope to drive out competitors and raise prices to monopolistic levels. By doing this, they covered their short term loss to make even greater profits in the long term than they would have by not using predatory tactics (Sheffert). Predatory pricing became illegal under Section 2 of the Sherman Act. It has remained one of the more difficult allegations for prosecutors to prove, due to the complexity of determining the company’s actual intent and whether or not it the strategy is competitive pricing. According to Areeda and Turner, there are three ways to determine if a firm is implementing predatory pricing. First, a price above marginal cost is presumed lawful; second, a price below marginal cost is considered unlawful, except when there is strong demand; and third, average variable cost is considered a good proxy for marginal cost. This is a reason predatory pricing is still important today. The courts must decide whether or not companies are engaging in competitive prices for the good of the consumers or are using predatory tactics for the good of their own company. The purpose of this paper is to focus on the current legislation regarding predatory pricing, determining when there is predation in an industry and the cause and effect relationship it has on an industry.
Sloman, J., Hinde, K. and Garratt D. (2013) Economics for Business, 6th ed., Prentice Hall / Pearson,
Fast food chains use value pricing. This type of pricing is how much the customer thinks an item on the menu is worth. Basically what this means is customers see price as a primary indicator of a product’s value. Value pricing happens when a company increases a product’s benefits while either maintaining or decreasing the price. A great example of value pricing in McDonald’s is the ability to “super-size” drinks and fries. The value of the drink or fries is increased because a customer can get substantially more of the item for a fraction more of the
A perfectly competitive market is based on a model of perfect competition. For a market to fall under this model it must have a number of firms, homogeneous products, and easy exit and entry levels into the market (McTaggart, 1992).
The Perceived Demand Curve for a Perfect Competitor and Monopolist (Principle of Microeconomics, 2016). A perfectly competitive firm (a) has multiple firms competing against it, making the same product. Therefore the market sets the equilibrium price and the firm must accept it. The firm can produce as many products as it can afford to at the equilibrium price. However, a monopolist firm (b) can either cut or raise production to influence the price of their products or service. Therefore, giving it the ability to make substantial products at the cost of the consumers. However, not all monopolies are bad and some are even supported by the
Are the prices offered fair? The question helps the company realize how the customers perceive the product about price.
The low prices at fast food restaurants may at first glance seem low, but the
Price discrimination is a corporate strategy where a seller offers the same product to customers at different prices. This practice is a technique where sellers appeal to a wide range of customers and capitalize on opportunities to maximize profits. The word discrimination often has a poor connotation. However, in terms of finances, the word discrimination merely denotes to how sellers can sway market price in order to meet the demand of buyers. In the United States, price discrimination generally is discussed and debated at the higher education level. In higher education, price discrimination denotes a scenario where academies charge unlike tuition prices to students for the same quality of education. This practice can be done at both the university and departmental levels as well. In order for price discrimination to occur, the seller must have the ability to adjust price. Price discrimination is also used by a seller that is offering a product that has a strong consumer demand with few alternatives. This is done because customers are willing to pay more for a given product. This entry provides examples of price discrimination in the private sector and in higher education.
The effects and methods businesses use price discrimination are varied from gas stations pricing their gasoline at different prices according to the location and population demographic they are in, to the movie theatres pricing different tickets according to age group. In any industry if a business can capitalize and make better profits by conducting price discrimination they will. As discussed previously price discrimination is not necessarily a bad thing for the economy or consumers, the general public will be able to find the same or similar goods at lower prices by shopping at larger firms, which can help less fortunate families greatly considering the current economic situation. Those that find products which they frequently buy at lower prices will purchase these items in larger quantities than before raising profits for the business and helping the general
An oligopolistic market has a small number of sellers dominating market share and therefore barriers to entry are high. These sellers are highly competitive and do not act independently of each other. Access to information is limited so sellers can only speculate of their competitor’s actions. Sellers will take advantage of competitor’s price changes in order to increase market share.
The definition of microeconomics was presented a high level, and I was still left drawing a blank trying to discover how this method of social science correlated to my everyday life. Starting from week one Professor Julie Pelia assigned us topics that engaged our minds, and I quickly began to see how the various components of Microeconomics fit into my life. This summary of Microeconomics will cover some of
When a family eats at home they, will pay less than restaurants because when they buy food from the market they buy for better quality and a better price.