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| | What do these harmful economic activities have in common? They exploit addictions. The prices on these goods and services can be increased much more easily than on anything else. Someone addicted to drugs is still going to try to buy it even if the price increases by 10%, 20%, 50%, or 100%. The same can be said for gambling, pornography, alcohol and almost every other vice. They are profitable to sellers who exploit the addiction. Buyers lose their money and ultimately their lives. | | What do these harmful economic activities have in common? They exploit addictions. The prices on these goods and services can be increased much more easily than on anything else. Someone addicted to drugs is still going to try to buy it even if the price increases by 10%, 20%, 50%, or 100%. The same can be said for gambling, pornography, alcohol and almost every other vice. They are profitable to sellers who exploit the addiction. Buyers lose their money and ultimately their lives. |
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| − | ==Price Discrimination==
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| − | The term “price discrimination” sounds ugly, but it means selling the same good or service at different prices to different people. It is an attempt by a seller to capture additional money from buyers who are willing to pay more.
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| − | Airline tickets are an example. Businesses are willing to pay more for airline tickets for their employees to travel to business meetings than tourists are. Why? Because the businessmen are traveling to make more money for their company, and the airline ticket can be paid out of their profits. If they are flying to do a deal worth $100,000, then they’re willing to pay many thousands of dollars for the airline ticket. Not so for tourists who fly.
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| − | The airline wants to sell the same seat at a price low enough for the tourist to pay, and then at a different, much higher price for the businessmen. This is price discrimination, because it distinguishes or discriminates based on who the buyer is. “Perfect price discrimination” sells each unit of a good at the maximum amount each individual buyer is willing to pay.
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| − | There are laws against price discrimination, but most sellers find clever ways to do it anyway. Airlines distinguished between business customers and tourists by its “Saturday night stay-over” rule. If the traveller reserves the return flight to include staying over at least one Saturday night, then he is likely a tourist. If he flies out and back in the same week without staying through the weekend, then he is likely a businessman. So the airline tickets were then priced much more cheaply for those who stay over at least one Saturday night.
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| − | In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers. If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y. The price discrimination would collapse due to the resale market.
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| − | But some goods cannot be resold. Goods that are personal to the buyer, like a tailored suit or dress, cannot be resold. Price discrimination works fine for personalized goods or exclusive markets, because there is not a resale market to destroy the discrimination.
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| | ==Tariffs and Quotas== | | ==Tariffs and Quotas== |
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| | Raising the minimum wage thus entices students to take advantage of a "short-term" benefit of the higher wage, but they are worse off in the "long-run". They would make more money by staying in school and not being enticed by the increase in the minimum wage. | | Raising the minimum wage thus entices students to take advantage of a "short-term" benefit of the higher wage, but they are worse off in the "long-run". They would make more money by staying in school and not being enticed by the increase in the minimum wage. |
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| | + | ==Price Discrimination== |
| | + | |
| | + | The term “price discrimination” sounds ugly, but it means selling the same good or service at different prices to different people. It is an attempt by a seller to capture additional money from buyers who are willing to pay more. |
| | + | |
| | + | Airline tickets are an example. Businesses are willing to pay more for airline tickets for their employees to travel to business meetings than tourists are. Why? Because the businessmen are traveling to make more money for their company, and the airline ticket can be paid out of their profits. If they are flying to do a deal worth $100,000, then they’re willing to pay many thousands of dollars for the airline ticket. Not so for tourists who fly. |
| | + | |
| | + | The airline wants to sell the same seat at a price low enough for the tourist to pay, and then at a different, much higher price for the businessmen. This is price discrimination, because it distinguishes or discriminates based on who the buyer is. “Perfect price discrimination” sells each unit of a good at the maximum amount each individual buyer is willing to pay. |
| | + | |
| | + | There are laws against price discrimination, but most sellers find clever ways to do it anyway. Airlines distinguished between business customers and tourists by its “Saturday night stay-over” rule. If the traveller reserves the return flight to include staying over at least one Saturday night, then he is likely a tourist. If he flies out and back in the same week without staying through the weekend, then he is likely a businessman. So the airline tickets were then priced much more cheaply for those who stay over at least one Saturday night. |
| | + | |
| | + | In general, price discrimination depends on the existence of obstacles to prevent buyers from reselling their goods to other buyers. If the same good is sold at $X to person A and $Y to person B, and X<Y, then person A could buy an extra good and sell it to person B at less than $Y. The price discrimination would collapse due to the resale market. |
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| | + | But some goods cannot be resold. Goods that are personal to the buyer, like a tailored suit or dress, cannot be resold. Price discrimination works fine for personalized goods or exclusive markets, because there is not a resale market to destroy the discrimination. |
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| | ==Assignment== | | ==Assignment== |