How Price Discrimination Affects Consumers and Firms - Assignment Example

Short Answer Questions Name Institution Course Tutor Date Question 1 (A) Price discrimination Price discrimination is a pricing strategy executed on identical goods and services transacted at different marketplaces using different prices by the same marketer. The cost of production of the commodities might be the same, but consumers are charged different or separate prices based different market. For optimal resource allocation, it is inevitable in real life situation to evade price discrimination. Uniform pricing can never be achieved since firms do have some monopoly power and in case they do not have they engage marketing techniques to keep their market unique therefore making cost differentiation generally possible. In order to have successful price discrimination, certain assumptions are met. The firm identifies different market segments such as local users and industrial users. The above mention segments must have different price elasticity based on their market operation. Market scenarios must be kept apart, either by physical distance, by time under operation or the mode of use based on distinct prices. The firm, in this case, is assumed to have some degree of monopoly power and furthermore assumed there is no seepage such that a consumer purchase at a lower price in one market, sell it to a demanding consumer in another inelastic market at a higher price to get a profit (Agarwal, 2010 p.354). (B) The cinemas charge half prices on admissions as a way of price discrimination with an aim of maximizing admission which economically translates to higher profits. The firm, therefore, is able to exploit many willing customers able to pay minimum amount cited and from it the firm gains a pure profits (Lipsey & Chrystal 2015, p 01). Thus graphically, P2 and Q2 represent a point of maximization of output, by setting price=SMC. (C) How price discrimination affects consumers and firms Price discrimination benefits both the consumer and the firm in a number of ways. Maximizing revenue gain and the ability to drive competitors out of business, a scenario known as predatory pricing are some of the benefits. It enables the firm to strive and stay relevant in a business where they could have made losses which lead to their liquidation. Price discrimination if not handle well may lead to a decline in consumer index leading to reduces sales thus affecting the profitability of the company. On the other hand, consumers are able to enjoy discounted prices on the cost of commodities and services and thus save their income. In other cases, consumers may suffer paying higher prices though those paying so may not be the poorest. Question 2 (A) Public goods refer to goods by which consumption by additional consumers does not reduce the quantity consumed by existing consumers. It possesses two main features; non-excludability in the benefit derived from it cannot be confined solely to those who have paid. Everyone, therefore, benefit from it with no financial cost involved, its consumption by one consumer does not restrict another consumer from enjoying it. It's prone to the free-rider problem, where it is not possible to evade other people from consuming a good that someone purchased. Generally, the marginal cost of supplying a public good to an extra person is zero, and if supplied to one person, it is available to all. Examples include street lights, public water supply, and national defence. Generally, the free market cannot either charge or provide those goods but instead, the state is entrusted to provide them. Private goods- they are goods which are both excludable and rival in consumption. One can prevent another person from enjoying it. For instance, ice cream cone consumption is possible to exclude someone from eating by not giving him. Ice-cream cone is rivalled in consumption because one person can eat it while the other cannot eat the same cone. Such good involves expenditure. Those goods are provided in free market and the firm benefit through outsourcing profit from it Merit goods are not immediately fully recognized at the time of consumption. The utility gain from consumption less any private cost incurred equated to net consumer surplus is referred to net private benefit. It's actually a good that people underrate benefits of consuming them. This type of good usually has positive externalities. For example, Education as merit good, the students cannot possibly be aware of the specific private benefit of education to them in getting good grades at school, college or university. It involves uncertainty on the future job, earnings in salary, status or skills. Consumption of merit good by students do also benefit the society either immediately or in future. Beneficiaries include future employers, family, and friends. The better the job they gain, the more the tax they pay and the more welfare benefits to the society. However, at the point of learning, it is impossible to value these external benefits. People undervalue benefits of education. Free-market provides in insufficient quantities merit goods because of economical factors such their pricing (Lipsey & Chrystal 2015). (B) Private roads can be provided by the market. This is because of individual needs such as gaining access to land. This is a good idea because it is the most efficient way of meeting demand where there is a shortage. Moreover, the general public can use it. (C) Output (units) Price per unit $ (MSB) Marginal (private) cost of the firm $ (MC) Marginal externalities(pollution) cost $ (MEC) Marginal social costs $ (MSC) 1 100 30 20 50 2 100 30 22 52 3 100 35 25 60 4 100 45 30 75 5 100 60 40 100 6 100 78 55 133 7 100 100 77 177 8 100 130 110 240 (II) Profit Maximizing level of the firm Profit maximizing level of the firm will be a situation where Marginal Revenue (MR) equates to Marginal Cost (MC) and Price (P) is equal to Marginal Social Benefit (MSB), given no externalities. Profit maximizing level is where marginal revenue equates to marginal cost and its is also where profits increase where marginal profit is positive and thus the firm needs to maximize profits. The firm will maximize profits when marginal social benefit outweigh marginal social costs, shown in the table in the production of 5,6,7 and 8 units respectively. (II) Social efficient level of output Social efficient level of output refers to what the market is able to achieve, given that there is optimal distribution of resources in the society after taking into consideration both external and internal costs and benefits where MSB=MSC, it represents, a point where a social efficiency occurs. From table calculation, the social efficient level of output is at 5 units, where MSB=MSC. (III) Marginal pollution cost increases as illustrated in the table because as the firm increases output in units, the rate of pollution also increases proportionally. Question 3 (A) Calculation of Nominal GDP for year 2005 and 2014 Nominal GDP is analyzed at the current market prices, not taking into consideration the current rate of inflation (rise in the price level) or deflation ( fall in the overall price level). The nominal GDP for year 2005 is the addition of incomes realized from sales of both cameras and cars; Cameras earns 200 * 10,000 = $ 2,000,000 Cars earns 1000 * 6,000 = $ 6,000,000 Total Nominal GDP $ 8,000,000 Nominal GDP for 2014; Cameras 1,000 * 2,000 = $ 2,000,000 Cars 1,500 * 10,000 = $ 15,000,000 Total 2014 Nominal GDP $ 17,000,000 (B) Calculation of Real GDP in year 2014, using 2005 as base year price In the calculation for real GDP, values are adjusted to differences in price levels. By taking 2005 as base year the real GDP for 2014 is calculated by taking the quantities of goods purchased in 2005 and multiplying them by their 2014 prices as analyzed; Cameras 200* 2,000 = $400,000 Cars 1,000* 1,500 = $1,500,000 Real GDP $ 1,900,000 (C) Key macroeconomic objectives discussed (I) Low unemployment and low inflation The serious disagreement between unemployment and inflation has been a big problem to the world economist's. According to Philips' curve there exist a negative relationship between inflation and unemployment in the short run. As the government tries to control high inflation, through the high rate of interest and reduce government expenditures, consumption and investment spending are discouraged, resulting in a low demand of labor (unemployment). Reduction in rate of unemployment is only possible at a high rate of inflation (Agarwal, 2010, p.353). Therefore, it is important for economists to acknowledge that there a trade-off between unemployment and inflation. (iii) High and sustainable economic growth High and sustainable economic growth is desirable in every country. When there is an excessive increase in demands by consumers, it translates to rapid economic growth fuel by an increase in prices which literally means increase inflation. Economists' therefore aims to mitigate inflation at the expense of maintaining sustainable economic growth (Agarwal 2010, p.352). (IV) Satisfactory balance of payment The aim of economists' is to maintain equilibrium in balance of payment, at the same time enhancing economic growth through increase spending on foreign goods as compared to domestic goods even though it leads to disequilibrium in balance of payment (Agarwal, 2010 p.353). (V) Exchange rate stability Different countries employ different monetary and exchange rate policies to maintain the stability of exchange rate from fluctuating undesirably (Isard 1997, p.227). (VI) Low budgetary deficit The main objectives of macroeconomics are to avoid budgetary deficit through proper budgeting and avoiding unnecessary expenditures (C) The four stages of business cycle The business cycle involves alternating upswings and downswings periods of economic growth and contraction in the level of real output. Rise and fall in GDP is the key measure to this caused by micro-economic factors such as changes in employment (Lipsey & Hurbury 1994, p.296). It involves the following stages; (I) The peak stage It is a phase in the business cycle in which real GDP reaches its maximum after rising during a recovery period. It is manifested by the increased employment, better personal income and sales rise (Tucker, 2011 p.161). (II) The recession stage It is the stage of downswing in the business cycle, by which real GDP reduces drastically while unemployment rises successively. The production capacity at this stage is underutilized and firms experiences fall in profitability index (Tucker 2011, p.161). (III) The trough This stage represents a situation when real GDP reaches its knees (bottom out) after declining during the recession. At this level, both workforce without jobs and idle production capacity are at their greatest levels as compared to recent years (recession stage). (IV) The recovery stage (upturn) This stage can also be referred to as an expansion phase since economic situations generally improve. It is manifested by improvement in returns to businesses, real GDP rises rapidly and the rate of employment increases towards full employment scenario (Tucker 2011, p. 161). Question 4 (A) (I) Calculation of the level of GDP for Disneyland GDP= C+ I + G + (X- M). = 1,550 + 575 + (850 – 600). =$ 2,375 (II) Calculation of Withdrawal and Injections into the circular flow Applying Keynesian circular flow formulas; Withdrawals (W) = (S + T + M) equal to Injection (J) = (I + G + X). Thus, =W=( 200 + 1,225 + 600 ) =J= (575 + 900 + 850 ) The difference between withdrawals from injections is $ 300. Therefore, since injections exceed leakages (withdrawals) then the volume of basic flow expands and the aggregate production increases thus move the economy towards equilibrium balance (Agarwal 2010, p.353). (B) (I) The multiplier is a Keynes' concept that relates to changes in investment as a result of a change in income (Lipsey & Harbury 1994, p. 296). (II) Assuming that full employment is achieved at the level of GDP of $ 200 billion Then there will be inflationary gap since equilibrium GDP of $ 1,120 billion is greater than full employment GDP of $ 200 billion, implying injections>withdrawals. Since aggregate expenditure (E)= AD= cd +J and GDP=E, then $ 1,120 = $ 1,120 thus government expenditure is at equilibrium. (iii) The government expenditure has to be changed by $ 920 billion in order to close this gap. References Agarwal, V 2010, Macroeconomics theory and policy, Dorling Kindersley, New Delhi. Isard, P 1997, Exchange rate economics, Cambridge University Press, Cambridge. Lipsey, R & Chrystal, A 2015, Economics, Oxford University Press, Oxford. Lipsey, R. G & Harbury, C 1994, First principles of economics, Oxford University Press, Oxford. Tucker, I. B 2011, Macroeconomics for today, South-Western Cengage Learning, Mason, OH. Read More