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Economic - Essay Example

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Since November 1994, Eurostar has been providing short-haul travel services in Europe, transforming the way of traveling and making it possible for a large proportion of population to avail their service. It has established connecting services and has links with over hundred destinations in different parts of Europe…
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Extract of sample "Economic"

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It is important to understand the concepts of one-price policy and variable-price policy. One-price policy is when the same price is fixed for the product by the seller, irrespective of who the consumer is. Variable-price policy is one whereby, seller sells the same product at varying prices to different customers. Large-scale manufacturers and big retailer usually follow one-price policy. On the other hand, small-scale manufacturers and small retailers follow variable-price policy. Variable-price policy is said to be prejudicial about the credibility and prestige of the customers. (R. D. Agarwal, p. 410, 1983)
The concept of contribution pricing is relevant here. Contribution pricing is the setting of prices based on the principle that as long as an item is sold for more than the variable cost, it is making a contribution towards the overheads of the business. This notion may lead a firm towards one of two approaches to pricing; price discrimination and loss leaders. In case of Eurostar, price discrimination is relevant.
Price discrimination occurs when different prices are charged to different people for what is essentially the same product. This is done in order to maximize revenue by charging more to those that can afford, and are willing to pay more. Price discrimination is a response to the recognition that different types of people may have different price elasticities of demand for a product. For instance, people under 16 years of age get high-price entrance to cinemas and football grounds in many parts of the world. This is because the owners know that higher prices will cut their demand substantially. In this case, as in all considerations of price discrimination, it is essential that there should be the minimum of crossover between market segments. In other words, if many adults could get in for half-price, the point of the discrimination would be lost.
It is important to remember that price discrimination is when a firm sells the 'same product or service' at varying process to different customers. This also applies to off-peak and on-peak telephone calls or train fares. Perfect price discrimination occurs when all the consumers are charged a different price, whereby the entire consumer surplus has been taken over by the business.
For an understanding of the concept of consumer surplus, it is important to understand that a consumer good will be valued more highly by some consumers than by others. Yet they all pay the same price for it when uniform pricing policy is being applied. Some consumers would be willing to pay a price higher than the actual market price. The term consumer surplus refers to the value of the extra satisfaction which these customers get from the item, over and above what they have had to pay for it. The consumer surplus is shown on a supply and demand diagram by the triangle enclosed by the demand curve and the price line. The demand curve shows how consumers value the product and all those who are prepared to pay at a higher price get some extra satisfaction.
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