Often do we come across situations when we find that a single producer sells his product at different prices to different buyers or in different markets. This practice of charging different prices to different buyers or in different markets for the same product is called Price discrimination. According to British economist Joan Robinson, “the act of selling the same article, produced under a single control, at different prices to different buyers is called Price discrimination.” Price discrimination is a practice firms employ when they charge consumers different prices for the same good in order to earn higher profits. Price discrimination is made possible because of varying utility derived from the consumption of the same good and varying price elasticity of demand. There are 3 types of price discrimination, namely: first-degree price discrimination (perfect price discrimination), second-degree price discrimination and third-degree price discrimination. A firm is said to have practiced first-degree Continue reading
Economics Principles
Theory of Absolute Advantage and Comparative Advantage
Theory of Absolute Advantage If one region can produce a commodity with less expense than another, and they exchange, then both should benefit. In a nutshell, this is the law of comparative advantage. It is used as the justification for WTO trade regulations. Some land grows corn better than other land. This economical insight into farming in early 18th Century was the cornerstone of the law of absolute advantage. Some farmland will yield more corn per acre than another, therefore the good land confers an absolute advantage over other regions. The conclusion drawn from this argument is that the farmer of the poor land should change products that it can produce to its absolute advantage, such as grazing sheep. The law of absolute advantage is based on the assumption that competition is the best paradigm within which to build an economy, it assumes that competition will improve production. The Continue reading
Profit Maximization Under Price Discrimination
The aim of the discriminating monopolist is to maximize profits. We can thus derive the condition of profit maximization under price-discrimination by extending the normal theory of the firm to a case where there are two or more markets instead of just one market. We can build up the theory of profit maximization on the basis of certain assumptions : There are two markets A and B. The aim of the monopolist is to maximize profits. He enjoys monopoly position in both the markets. The elasticity of demand for the product in the two markets is different (This is perhaps the most essential condition for price discrimination to be profitable). Price discrimination, according to Stonier and Hague “will be profitable only if elasticity of demand in one market is different from elasticity of demand in the other. In general, it will pay a monopolist to discriminate Continue reading
International Trade Theories – Absolute, Comparative and Competitive Advantage
Absolute advantage theory was first presented by Adam Smith in his book “The Wealth of Nations” in 1776. Smith provided the first concept of a nation’s wealth. Adam Smith is a grandfather of economics because he introduced two important concepts that many of the new trade theories are based on these two main concepts, which are specialization and free exchange. However, many arguments were made and many economists thought there was a problem with the theory of absolute advantage after David Ricardo published the theory of “comparative cost” (aka “comparative advantage”) in the early 19th century. Even though Smith and his followers introduced many important points for the thoughts of economic, it is too complicated with this simple version of trade theory in today’s global economy. In 1990, Michael Porter introduced the diamond model of new competitiveness theory. These three trade theories are important in order to make a country Continue reading
Poverty Trap
Poverty trap is a situation where an unemployed person receiving social security benefits not encouraged to seek work because his or her after €tax earnings potential in work is less than the benefits currently obtained by not working. The poverty trap occurs due to benefits such as income support, housing benefit, single parent allowance and family tax credit. Given that social security benefits represent the ‘bottom line’ (that is, the provision of some socially and politically ‘acceptable’ minimum standard of living), the problem is how to reconcile this with the ‘work ethic’. For example, consider the case of a low-skilled person in the UK. He is unable to get a high-paid job because he doesn’t have the right skills, training or experience. He has two options. First one is to get a low-paid job or second option is to claim unemployment benefits. If he gets a low paid job he Continue reading
Price Elasticity Of Demand – Concept and Types
The price elasticity of demand measures the degree of responsiveness of quantity demanded for a certain commodity to the change in its price. In other words, the price elasticity of demand is defined as the ‘ratio of percentage change in the quantity demanded to the percentage change in price. It can be expressed as follows: Price elasticity of demand (ep) = Percentage change in quantity of demand / Percentage change in price Where, ep = Coefficient of price elasticity of demand. The price elasticity of demand is always negative due to the inverse relationship between the price and quantity demanded. But for the sake of simplicity in understanding the magnitude of response of quantity demanded to the change in the price we ignore the negative sign and take into account only the numerical value of the price elasticity of demand. Types of Price Elasticity of Demand There are five types of Continue reading