Price Discrimination/Government Taxes Flashcards
What is Price Discrimination used for by businesses and how can they apply this price discrimination in relation to price elasticity to a product?
Different consumer groups have different price elasticity of demand for the same products. Businesses can use this information to charge different prices and increase their total revenue.
Explain the price elasticity of demand (change in quantity demanded) in response to a price change for male and female haircuts and how a haircut business can increase total revenue for each demographic using this info.
e.g. Haircuts are more elastic for boys affecting the price as when price drops, there is a large increase in quantity demanded leading to a higher total revenue.
Haircuts for females are the opposite in terms of price and quantity and Total Revenue
What is the definition of Price Discrimination?
Price discrimination is a practice when businesses charge different prices for different demographics, situations, or times for the same product depending on their elasticity to price changes.
Why should businesses understand price elasticity of demand when practicing price discrimination?
To increase Total Revenue (TR)
Example of a tax?
GST - 10% Australia
Extra Taxes? Name? Examples?
Extra taxes on other good such as petrol, alcohol and Tobacco. Called excise prices.
Price inelasticity of supply and taxes.
A tax is a cost to the producer highest cost. It is shown by a decrease and shift leftwards of supply. The amount of the tax is the size of the supply shift.
Price inelasticity of demand graph and taxes. What is Tax Amount? What is the quantity demand change? What profit does producers receive?
Government Tax Revenue Calculation?
Vertical distance between two supply curves is tax amount (P2 to P3)
New quantity is at Q2 (leftwards shift), Not much due to being inelastic.
Producers receive profit of P3, should’ve been P1 without tax. (P2 - P3)
Government Tax Revenue = (P2-P3) x (Q2) - L*W
Three features of a tax
- Increases the price paid by consumers
- Decreases the quantity sold
- Generates tax revenue for the government
