Price discrimination

Question 1

Price discrimination

Answer 1

When a firm charges different prices to different customers for the same price

Question 2

Assumptions of price discrimination

Answer 2

-Firms must have price making power so barriers to entry are likely to exist
-Firms should be able to identify and separate different groups of customers by understanding their PED’s
-No seepage-when customers can buy at a lower price from the firm and resell it themselves

Question 3

Why do firms price discriminate

Answer 3

-It allows seller to charge higher prices to people who place a higher value on products and charge lower prices for those who are more sensitive to prices e.g. peak and off peak train times

Question 4

Consumer surplus

Answer 4

The difference between the current market price and the maximum price consumers are willing to pay. A measure of consumer welfare

Question 5

Producer surplus

Answer 5

The difference between the market price and the minimum price the producer is able to sell at. A measure of producer welfare,

Question 6

First degree price discrimination

Answer 6

When the firm knows the maximum price that each individual consumer can pay. The firm is able to charge a different price to each consumer and maximise its its potential to extract profit and revenue from the market. There is no consumer surplus as they pay maximum possible price.

Question 7

First degree price discrimination rality

Answer 7

In reality this is impossible as perfect information is needed and gathering this information is very costly eating into profit so it is unlikely a firm will ever benefit from first degree price discrimination.

Question 8

Second degree price discrinination

Answer 8

Often occurs in wholesale markets as discounts are provided to those who buy a large quantity of goods. The price charged is based on the quantity you buy which encourages large orders to be made.

Question 9

Third degree price discrimination

Answer 9

When a firm charges different prices from the same products across different segments of the market e.g. peak vs off peak travellers, children vs adults and adult vs pensioner.

Question 10

Third degree price discrimination characteristics

Answer 10

-Firms raise prices for groups with lower elasticity of demand and lower prices for groups with higher elasticity of demand.
-Profit max occurs at MC=MR as always
-The firm is better able to profit maximise because they produce more revenue from each group than without discrimination