monopolies- price discrimination

Question 1

why is first degree used

Answer 1

Can charge different prices to each person so marginal rev= demand

Consumers charged the highest price that they are willing to pay for a product.

Some consumers will be willing and able to pay more than others

Question 2

why is second degree used

Answer 2

Businesses may have excess capacity e.g seats that would be empty on a lane, theatre or at a football match

It makes sense to sell these seats at a lower price

Any revenue generated helps to cover fixed costs- the marginal cost of adding an extra consumer is low

Question 3

why is third degree used

Answer 3

Setting price bands in the market which take the price elasticity of demand of different groups of consumers into account

Inelastic- higher prices, elastic- lower

Question 4

what are the benefits of price discrimination (3)

Answer 4

May generate positive consumption externalities e.g., switching journeys from road to rail

Firms may generate future profit by offering lower prices to groups in the ST who then continue to be full-paying LT customers

Firms make high profit – may be reinvested to benefit consumers or to benefit the firm itself