Price discrimination

Question 1

What is price discrimination

Answer 1

When a firm charges different prices to different consumers for a identical good/service with no differences in cost of production

Question 2

Conditions necessary for firms able to price discriminate

Answer 2

• Price making ability: they may need some type of monopoly power - Information; Separate market into different sections via price elasticity of demand e.g identify groups of consumers with price in elastic demand so they can charge higher prices and vice versa. -Prevent re-sale of a good

Question 3

When does first degree discrimination occur?

Answer 3

Occurs when consumers are charged the exact price they are willing and able to pay for a good or service and therefore eroding all consumer surplus within a market and turning it into a monopoly profit.

Question 4

Show 1st degree discriminatio on a graph

Answer 4

Consumer surplus is turned into monopoly profit as consumers are paying the exact amount they are willing and above to pay for a good or service

Question 5

What is excess capacity pricing

Answer 5

This is where a firm with fixed capacity e.g a hotel, it makes no sense leaving any of the excess capacity idle. Therefore these companies may lower their prices last minute in order to contribute to their fixed costs.

Question 6

Draw a diagram to explain the idea of second degree pricing when there is excess capacity

Answer 6

Companies have fixed cost they have to pay which is shown on their marginal costs curve.

• q cap is where marginal costs curve is at the point. Qcap is the capacity.