1. What is a price taker? Discuss the assumptions that are made in order to obtain the perfectly competitive model.
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Our book defines a price taker as a perfectly competitive firm that must take the price of its product as given because the firm cannot influence its price (Miller). This is like having 3 soda machines with the exact same soda in them just with a different label, on machine has it for a dollar each another has it for 1.50 and the last has it for 2.00. Everybody knows that the sodas are all the same so they pick the 1.00 sodas, no other sodas are sold since the dollar machine has the lowest price, the other machines must lower their price to a dollar to be perfectly competitive, and this is called taking the price
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Even when not making any economic profit a firm is making an accounting profit, this is usually a good enough reason for the firm to operate permanently at this price especially when the market rate of return is equal to or less than the accounting profit of the business. If on the other hand the market rate of return is greater than the break-even price then the business is running at an economic loss. This would still look like a profit to an accountant.
Miller, R. (2012). Perfect Competition. In Economics Today The Micro View (16th ed., p. 515). Boston, MA: Pearson Addison-Wesley.
3. An upscale bistro in a small town charges higher prices for the same menu items at dinner time than at lunch time. Does the bistro necessarily practice price discrimination? Explain your answer.
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The bistro is not necessarily practicing price discrimination, I personally believe it would be price differentiation because the operating costs to run the bistro at dinner are most likely higher, and demand is higher. The operating costs are higher because of the staffing requirements for the dinner rush, more wait staff cooks and greeters are needed to handle the greater volume of diner patrons. If the customer and demand load is similar to the lunch time then they are practicing price
Price discrimination can be defines as when a firm offers an “individual good at different prices to different consumers” The Library of Economics and Liberty elaborates on its pricing strategy, stating Comcast offers different pricing depending on what features the consumer desires. For instance, the cable company will charge a higher price to a person who uses several services as part of their cable package. Conversely, the firm charges a very low price to someone who would “otherwise not be interested” , providing basic services at a minimum price. It takes advantage of the regulation imposed on the cable industry by offering the required basic package at seemingly attractive prices. Using this pricing system allows for it to attract different consumers whose maximum price they are willing to pay differs. Recently, Comcast attempted a new billing strategy by introducing a data usage cap. It essentially expanded on the company’s existing price discrimination method by charging customers according to how much data they used each month. Comcast also utilizes penetration pricing, where it offers its product at low prices to attract new consumers, later raising the prices once the customer is subscribed for a certain amount of time. Generally it claims the original prices were promotional only, lasting only a small amount of
Topic A (oligopoly) - "The ' An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies.
...e. A price gouger needs to charge more in order to avail the product or service. In the case of Raleigh, the roads to the town were not accessible due to fallen trees and rocks. An entrepreneur would need to cut the trees and remove the rocks in order to take the product there. People who do that need compensation for all the trouble they take to bring products to the market. The youths who brought ice to Raleigh town had to cut down trees in order to access town. Instead of selling ice as the “right price” of less than 2 dollars, the youths charged more than 8 dollars. The price provided just there right compensation for all their efforts. Banning price gouging led to serious suffering of the people because the little food left went bad causing even more losses. For a few dollars for the price of ice, Raleigh residents could have saved millions worth of food.
A perfectly competitive market is based on a model of perfect competition. For a market to fall under this model it must have a number of firms, homogeneous products, and easy exit and entry levels into the market (McTaggart, 1992).
Fast food chains use value pricing. This type of pricing is how much the customer thinks an item on the menu is worth. Basically what this means is customers see price as a primary indicator of a product’s value. Value pricing happens when a company increases a product’s benefits while either maintaining or decreasing the price. A great example of value pricing in McDonald’s is the ability to “super-size” drinks and fries. The value of the drink or fries is increased because a customer can get substantially more of the item for a fraction more of the
Predatory pricing “is alleged to occur when a firm sets a price for its product that is below some measure of cost and forfeits revenues in the short run to put competitors out of business” (Sheffet p.163-164). The reason firms take the short term loss is because they hope to drive out competitors and raise prices to monopolistic levels. By doing this, they covered their short term loss to make even greater profits in the long term than they would have by not using predatory tactics (Sheffert). Predatory pricing became illegal under Section 2 of the Sherman Act. It has remained one of the more difficult allegations for prosecutors to prove, due to the complexity of determining the company’s actual intent and whether or not it the strategy is competitive pricing. According to Areeda and Turner, there are three ways to determine if a firm is implementing predatory pricing. First, a price above marginal cost is presumed lawful; second, a price below marginal cost is considered unlawful, except when there is strong demand; and third, average variable cost is considered a good proxy for marginal cost. This is a reason predatory pricing is still important today. The courts must decide whether or not companies are engaging in competitive prices for the good of the consumers or are using predatory tactics for the good of their own company. The purpose of this paper is to focus on the current legislation regarding predatory pricing, determining when there is predation in an industry and the cause and effect relationship it has on an industry.
Sloman, J., Hinde, K. and Garratt D. (2013) Economics for Business, 6th ed., Prentice Hall / Pearson,
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).
The Perceived Demand Curve for a Perfect Competitor and Monopolist (Principle of Microeconomics, 2016). A perfectly competitive firm (a) has multiple firms competing against it, making the same product. Therefore the market sets the equilibrium price and the firm must accept it. The firm can produce as many products as it can afford to at the equilibrium price. However, a monopolist firm (b) can either cut or raise production to influence the price of their products or service. Therefore, giving it the ability to make substantial products at the cost of the consumers. However, not all monopolies are bad and some are even supported by the
Are the prices offered fair? The question helps the company realize how the customers perceive the product about price.
The low prices at fast food restaurants may at first glance seem low, but the
The goods and services provided by each seller are differentiated by cuisine, skill, ingredients used and more. Each seller sets their prices according to their production costs with little regard for other competitors. There is high access to information, such as prices, menus and reviews, but limited by the fact that the value can only be determined after the experience.
When a family eats at home they, will pay less than restaurants because when they buy food from the market they buy for better quality and a better price.
Price is what a buyer must give up to obtain a product. It is often the most flexible of the four marketing mix element that the price is the quickest element to change. A marketer can raise or lower prices more frequently and easily than they can change other marketing mix
The definition of microeconomics was presented a high level, and I was still left drawing a blank trying to discover how this method of social science correlated to my everyday life. Starting from week one Professor Julie Pelia assigned us topics that engaged our minds, and I quickly began to see how the various components of Microeconomics fit into my life. This summary of Microeconomics will cover some of