Posts Tagged ‘Markets’
Price Discrimination Response
Posted on: January 26, 2011
November 2006
Explain the necessary conditions for price discrimination to take place.
Price discrimination occurs when a producer charges a different price to different customers for an identical good or service. It is carried out primarily to increase the profits of the discriminating firms. Price elasticity of demand (PED) is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
Three conditions are necessary for price discrimination to take place: imperfection of the market, separable market, differing price elasticity of demand.
Price discrimination (Picture by nowsell.com)
In order for the price discrimination to take place, there must be some imperfection of the market. If there were perfect competition, price discrimination would be impossible since the individual producer could have no influence on price. Some degree of supplier’s power is necessary so that they have some ability to choose the market price.
Secondly, the discriminating supplier must be able to split the market into separate sections and keep them separate. Some ways of splitting the market are by geographical conditions, temporal conditions, and consumer types (such as age, sex, and occupation).
Lastly, price elasticity of demand in each split market must be different. With this, the discriminating supplier would increase price in the market with an inelastic demand curve, and reduce price where demand is elastic in order to increase total revenue and profits.
McDonald’s in Haight-Ashbury
Posted on: September 15, 2010
McDonald's logo (Photo by Getty Images)
Demand is defined as that quantity of a good or service that would be bought at each and every price over a period of time. This means that demand combines: (1) the desire for a product, (2) a willingness to pay for it, (3) the ability to pay for it. The law of demand states: assuming that consumers act in a rational manner and other things being equal, the lower the price of a good, the greater the quantity demanded and the higher the price, the less the quantity demanded.
Prevalent in 118 countries, McDonald’s has taken over the world. The cheap price and tasty fast food has been attracting thousands of people daily. However, according to the articleccording to the article, “Hassle in Haight over McDonald’s menu change” in San Francisco Chronicles, McDonald’s in Haight-Ashbury, a neighborhood of San Francisco, decided to eliminate the Dollar Menu. The elimination of the Dollar Menu lead to rise in price of McDonald’s menu. Because of this rise in price, homeless people could not afford McDonald’s anymore. Thus, the demand of McDonald’s in Haight-Ashbury decreased in few months.
The Demand Curve below (Figure 1) clearly illustrates the situation of McDonald’s in Haight-Ashbury.
(Figure 1) Demand Curve of McDonald's in Haight-Ashbury after the rise of price
Consider that McDonald’s in Haight-Ashbury before eliminating the Dollar Menu as point X. Since the price of the fast food was low (as shown as P1), many people demanded McDonald’s (as shown as Q1). However, after McDonald’s decided to get rid of the Dollar Menu (as shown as point Y), the price of fast food rose from P1 to P2. Accordingly, the demand decreased from Q1 to Q2, for the homeless could not afford more expensive food.
As seen in Figure 1, as the price of McDonald’s food rose, the quantity demanded decreased, ceteris paribus; the point X moved along the demand curve to point Y.
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