ETS Chapter 13 Flashcards
What are system costs in pricing?
System costs refer to the total resources needed to transfer the right to use a service or product from producer to consumer. These include information costs and administrative costs.
Example: When a company sets a price for a transport service, it must consider the cost of processing transactions, such as issuing invoices and updating pricing data.
What are information costs in pricing?
Information costs involve the resources needed to gather, process, and distribute information about prices and market conditions.
Example: A company needs to research fuel prices, labor costs, and demand trends before setting transportation fares.
How do high information costs affect decision-making?
If information costs are too high, producers and consumers make decisions based on incomplete information, leading to inefficient resource use.
Example: A transport company may charge too much or too little for shipping due to a lack of updated fuel cost data.
Why do complex pricing systems have higher information costs?
Pricing systems that vary based on time or usage require more effort to understand, making them less efficient.
Example: A taxi fare system with different prices for peak and off-peak hours requires both drivers and passengers to constantly check rates.
What are administrative costs in pricing?
Administrative costs refer to the expenses involved in processing payments, issuing invoices, and maintaining transaction records.
Example: A toll booth that requires manual payment has higher administrative costs than an automatic electronic toll system.
Why can high administrative costs justify free services?
If administrative costs exceed the benefits of charging a price, it may be better to offer a service for free.
Example: A bridge with very low maintenance costs might be made free if collecting tolls costs more than the revenue generated.
How can technology reduce administrative costs in pricing?
Automated payment systems reduce labor costs and increase efficiency.
Example: Contactless payment systems in public transport eliminate the need for ticket sellers, reducing administrative expenses.
How do pricing costs impact efficiency?
High pricing system costs reduce efficiency by increasing transaction expenses for both producers and consumers.
Example: If a public transport company requires passengers to buy paper tickets instead of using a digital system, it slows down boarding and increases costs.
