Price Discrimination Gadis 8/30/2014

Summary by:

Gadis Octavia Ardiani (120720140033)

Price discrimination is a practice of charging different prices to different consumers for similar goods.

There are three types of price discrimination :  

1.  First degree price discrimination
This type of price discrimination requires the monopoly seller of a good or service to know the absolute maximum price (or reservation price) that every consumer is willing to pay. By knowing the reservation price, the seller is able to sell the good or service to each consumer at the maximum price he is willing to pay, and thus transform the consumer surplus into revenue.

2.  Second degree price discrimination

In second degree price discrimination, price varies according to quantity demanded. Larger quantities are available at a lower unit price. This is particularly widespread in sales to industrial customers, where bulk buyers enjoy higher discounts. For example, if we buy two movie ticket we only charge a half for the third ticket. This is a way to capture more consumer's surplus.

  
3.  Third degree price discrimination

In third degree price discrimination, price varies by attributes such as location or by customer segment, or in the most extreme case, by the individual customer's identity; where the attribute in question is used as a proxy for ability/willingness to pay. For example, movie tickets for children and adults are different. In this situation, price discrimination seeks to extract consumer surplus and turn it into producer surplus. 

Three conditions that must be satisfied before firms can successfully discriminate prices:

1.  Market Power

Market power is the company's ability to manipulate price by influencing supply, demand or both.

2.  Different Valuations

The market for a good must include a variety of consumers, who are willing to pay a different prices for the good. A consumer’s ‘willingness to pay’ is measured by their price elasticity of demand. The firm is able to charge a higher price to consumers with more inelastic demand.

3.  No Arbitrage

It must be impossible for consumers to buy the good at a low price, then resell it at a higher price to those who were not offered the low price.

Hurdle Pricing is existed when firms created obstacle that consumer must overcome to get lower prices. For example, the price of IPOD become lower after a month its release.

The consequences of price discrimination :

1.  Firm Profits

Firms will be able to increase revenue. This will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off peak.

2.  Output

Output can be expanded when price discrimination is very efficient.

3.  Consumer Welfare

Price discrimination presents a different welfare result for consumers. Consumers which have more inelastic demand are worse off in this situation, as they are charged a higher price. In contrast, consumers with more elastic demand are better off, as they are charged a lower price.

    

References : 

1. Pindyck, Robert S., Rubinfeld, Daniel L., Microeconomics, 7th Edition, Prentice Hall, 2009.
2. http://www.romeconomics.com/beginners-guide-price-discrimination [accessed : 30/08/2014]
3. http://en.wikipedia.org/wiki/Price_discrimination  [accessed : 30/08/2014]

Perfect Competition - a Thrift Shop (Macklemore & Ryan Lewis) Parody Unknown 8/30/2014

a Summary by:
Roni Jatmiko (120720140006)

          The video above is a parody of American hip hop duo Macklemore and Ryan Lewis's popular song – "Thrift Shop", which not only contains hilarious lyrics, but also expresses social critics in the recent economic situation.

          As the title suggests, essentially the parody video illustrates the perfect competition markets. In a perfectly competitive market there are a lot of players each of whom produce a low percentage of market output and cannot influence the prevailing market price. Likewise, no single buyer or seller is large enough to influence the market price.

Here are other characteristics of Perfect competitive market:

• Good knowledge about product quality, price, and cost
• Identical products are provided to the markets that are perfect substitutes.
• Perfect resource mobility - no Barriers to entry and to exit from the industry
• No externalities arising from production and/or consumption.

          A purely competitive market is also known a "price takers" market because sellers must take the current market price. If they set a price above the market price, no one will buy their product because potential buyers will simply shift to other sellers. Conversely, selling below the market price will just reduce profits and it also doesn't make sense since they can sell as many commodities as they want to at the market price. This idea is very well expressed by the singer, "I'mma shut this business down... no for real, demand's below AVC".

Equilibrium in perfect competition

          In the short run under perfect competition, businesses can generate super-normal profits or losses. Nevertheless, in the long run firms are attracted into the industry if the existing firms are making super-normal profits. This is due to the fact that there are no obstacles to entry and because there is perfect information.

Perfect Competition model in the real world

          There are only a handful of markets or industries in the real world are perfectly competitive. E.g. how homogeneous is the output of real firms, assumed that even the smallest of firms in product manufacturing or services try to vary their products.

          However unrealistic it is, still a suitable model for two different reasons. Firstly, numerous primary and commodity markets, such as coffee and tea, show many of the features of perfect competition. Secondly, for other markets in manufacturing and services, aviation business for example, the model is a useful measure by which regulators and economists can analyze the levels of competition in real markets.

The original music video

          Not only the parody version, the original music video also conveys a microeconomic perspective, especially in the sense of consumer behavior. It basically describes the artist's preference of goods at reasonable price compared to fancy branded products that cost much more expensive for relatively equal benefits.

References:

1. Perfect competition, Khan Academy, accessed on August 30, 2014
2. Microeconomics - Perfectly Competitive Markets, Investopedia, accessed on August 30, 2014
3. Macklemore Lyrics - Thrift Shop, A-Z Lyrics

Price Gouging Dilemmas from Different Perspectives Natsir Arif 8/30/2014

Simple Case Study of Price Gouging 

Price gouging is generally defined as charging a price that is higher than normal or fair, usually in times of natural disaster or other crisis. 

More specifically, price gouging can be thought of as increases in price due to temporary increases in demand rather than increases in suppliers' costs (i.e. supply).

The term is not in widespread use in mainstream economic theory, but is sometimes used to refer to practices of a coercive monopoly which raises prices above the market rate that would otherwise prevail in a competitive environment. 

In case there is an increase in demand, there isn't a way for everyone to get what they want at the original market price.

Instead, if the price doesn't change, a shortage will develop since the supplier won't have an incentive to make more of the product available (it wouldn't be profitable to do so and the supplier can't be expected to take a loss rather than raise prices).

When supply and demand for an item are in balance, everyone who is willing and able to pay the market price can get as much of the good as he or she wants (and there is none left over). 

This balance is economically efficient, since it means that companies are maximizing profit and goods are going to all of the people who value the goods more than they cost to produce (i.e. those who value the good most). 

When a shortage develops, in contrast, it's unclear how the supply of a good gets rationed- maybe it goes to the people who showed up at the store first, maybe it goes to those who bribe the store owner (thereby indirectly raising the effective price), etc. 

The important thing to remember is that everyone getting as much as they want at the original price is not an option, and higher prices would, in many cases, increase the supply of needed goods and allocate them to people who value them the most.

Price gouging is typically thought of as immoral, and, as such, price gouging is explicitly illegal in many jurisdictions. It's important to understand, however, that this concept of price gouging results from what is generally considered to be an efficient market outcome.

Price gouging might be problematic, nonetheless price that is higher than normal or fair, usually in times of natural disaster or other crisis. 

Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.

A prevalent concern surrounding price gouging is that it exploits consumers. Supporters of anti price gouging laws argue that it is morally wrong for sellers to take advantage of buyer’s vulnerability and increased demand. 

Opponents argue that buyers are not coerced to take part in this exchange, and they voluntarily agree to pay the seller’s asking price.

Price-gouging is often defined by law in terms of three criteria listed below:

1.   Period of Emergency :

The majority of laws apply only to price shifts during a time of disaster.

2.   Necessary items : 

Most laws apply exclusively to items which are essential to survival.

3.   Price ceilings : 

Laws limit the maximum price that can be charged for given goods.

Nonetheless, critics claim that laws against price-gouging could discourage businesses from proactively preparing for a disaster.

Many libertarian economists oppose price gouging legislation and argue that it prevents goods from going to individuals who value them the most and not just to those with the greatest wealth.

According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency. 

Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their most valued uses. In turn those who value the good the most (and not just the wealthiest) will be willing to pay a higher price than those who do not value the good as much.

According to Friedrich Hayek in The Use of Knowledge in Society, prices can act to coordinate the separate actions of different people as they seek to satisfy their desires.

Economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large or exorbitant price changes. 

According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses.

Video Spoiler Tags Alert:
Scarcity,Supply and Demand
Price Gouging
Opportunity Cost
Consumer Behaviour
Producer Behaviour
Competition

References :

Prof. Matt Zwolinski (University of San Diego,USA)
www.learnliberty.org
http://economics.about.com/od/changes-in-equilibrium/ss/The-Economics-Of-Price-Gouging.htm
http://en.wikipedia.org/wiki/Price_gouging
accessed on 30th August 2014

Price Elasticity - Show the responsiveness of Demand/Supply quantity Unknown 8/30/2014

 Price Elasticity of Demand and Supply

Summary by: 

Irwan Muhammad ( 120720140029 )

Price elasticity of demand (PED or E_d) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income)

The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand.

Elasticities of demand are interpreted as follows:

• If PED > 1 then Demand is Price Elastic (Demand is sensitive to price changes)
  
• If PED = 1 then Demand is Unit Elastic
  
• If PED < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)

Price elasticity of supply (PES or E_s) is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.

PES = (% Change in Quantity Supplied)/(% Change in Price)

The higher the price elasticity, the more sensitive producers and sellers are to price changes. A very high price elasticity suggests that when the price of a good goes up, sellers will supply a great deal less of the good and when the price of that good goes down, sellers will supply a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on supply.

References:

     http://en.wikipedia.org/wiki/Price_elasticity_of_supply [accessed 31/08/2014]

     http://en.wikipedia.org/wiki/Price_elasticity_of_demand [accessed 31/08/2014]

     http://economics.about.com/cs/micfrohelp/a/supply_elast.htm [accessed 31/08/2014]

     http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm [accessed 31/08/2014]

Consumer Behaviour by tatarudin tatarudin 8/30/2014

The Consumer Decision Making Process. If you know Consumer Decision Making Process, you can help firms understand Consumer Behavior, and if you know Consumer Behavior you can help firms to make a plan.

Consumer Behavior is description of how consumers allocate incomes among different goods and services to maximize their well-being, so congratulations to watch this video. 

References:

Consumer Behavior. Fernando & YVonn Quijano (Slide)

Decision Making Process: How Consumers Make Buying Decision?.  https://www.youtube.com/watch?v=Rn5a03Xp0Kc
The Consumer Behavior and Consumer Decision Making Process. https://www.youtube.com/watch?v=65Vt9nmVYDM

Oligopoly Unknown 8/30/2014

Summary by :
Megawati (120720140031)

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers. With few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm therefore influence and are influenced by the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

Characteristics of oligopoly :

• Profit maximization conditions. An oligopoly maximizes profits.
• Ability to set price. Oligopolies are price setters rather than price takers.
• Entry and exit. Barriers to entry are high, for examples, government licenses, economies of scale, and patents.
• Number of firms. "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.
• Long run profits. Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.
• Product differentiation. Product may be homogeneous (steel) or differentiated (automobiles).
• Perfect knowledge. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.
• Interdependence. The distinctive feature of an oligopoly is interdependence.
• Non-Price Competition. Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition.

Some of the better-known models describing the operation of an oligopolistic market are the dominant firm model, the Cournot-Nash model, the Bertrand model and the kinked demand model.

Examples of oligopoly in the world :

• Nestlé, The Hershey Company and Mars, Incorporated together make most of the confectionery made worldwide.
• Microsoft, Sony, and Nintendo dominate the video game console market.

References : http://en.wikipedia.org/wiki/Oligopoly
[accesed : 30/08/2014]