Price discrimination Definition: charging different prices for the same product to different consumers Examples –senior citizen discounts –airfares: business versus vacation travelers –student version of software (e.g.mathematica) –different prices in foreign markets –volume discounts

When can price discrimination occur? First, in order price discriminate, a firm must have some market power (as in the case of a monopoly) Second, in order to price discriminate, a firm must be able to separate buyers of a good into categories and prevent them from trading the goods with each other

Why does price discrimination occur? Because a firm can increase its profits by charging –a higher price to people who have a low elasticity of demand –a lower price to people who have a high elasticity of demand Intuitively, the low elasticity users are willing to pay the higher price while the high elasticity users would not be willing

Price Discrimination: 2 Groups

Volume Discounts

Elasticity and the substitution effect/income effect (Chapter 5) –income effect: amount by which the quantity demanded falls because of the decline in real income from the price increase –substitution effect: the amount by which the quantity demanded falls, exclusive of the income effect (other goods become relatively more attractive) Are there close substitutes? Is the good a big part of the budget?

Wrap up

Unifying Theme: people make purposeful choices with limited resources –scarcity –opportunity costs –illustrated with the production possibilities curve

supply and demand model equilibrium price and quantity shifts vs. movements along curves price ceilings and price floors

competitive equilibrium model consumers maximize utility (consumer surplus) firms maximize profits (producer surplus) Pareto efficient

cost curves long run vs short run at a firm ACT, Cost per Unit economies of scale

long run competitive equilibrium model entry and exit makes model dynamic cost per unit is minimized in long run

model of monopoly market power market failure (deadweight loss)

At The Margin, it is fun –marginal product of labor –marginal cost (MC) –marginal utility (MU) –marginal benefit (MB) –marginal revenue (MR) –firm: MC = MR (MC = P if competitive) –consumer: MB= P –market (competitive) MB = MC = P –market (monopoly) MB = P > MC