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b.Maximum willingness to pay = minimum acceptable price.

c.Combined consumer and producer surplus is at a maximum.

B.Efficiency (Deadweight) Losses

1.Underproduction reduces both consumer and producer surplus, and efficiency is lost because both buyers and sellers would be willing to exchange a higher quantity.

2.Overproduction causes inefficiency because past the equilibrium quantity, it costs society more to produce the good than it is worth to the consumer in terms of willingness to pay.

VI.LAST WORD:  Elasticity and Pricing Power: Why Different Consumers Pay

  Different Prices

A.Sellers often charge different prices for goods based on differences in price elasticity of demand.

B.The ability to charge different prices depends on some ability to control price (unlike the competitive model where all buyers and sellers exchange at exactly the same price).

C.Customers are grouped according to elasticities.  Business travelers have more inelastic demand for air travel, and thus can be charged a higher price than the more price elastic tourist.  The low budgets of children make their demand more price elastic, explaining why they receive discounts for movies or sporting events.  In a like manner, colleges and universities recognize that income differences cause students to have different elasticities of demand for higher education, and schools attempt to discount prices (through financial aid) based on price sensitivity.

D.The above are examples of price discrimination, a topic covered in more detail in Chapter 22.

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