Eco 11-5 - 1 Market Segmentation a Demand changes based on...

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Econ Notes 11/5/07 1. Average and Marginal Costs w/ a Downward sloping Demand curve a. See (Average and Marginal) i. Going from 0 to 1 in quantity, the MC=AVC ii. Firms will sell at the intersection between MR and MC (profit maximization rule) 1. Firms set MR=MC iii. Where MR=MC, this is the quantity that the firm will produce. 1. The price is then found based on this quantity, on the initial demand curve iv. Profit is the difference between the Price where ATC meets Q and the price of the good v. A DWL occurs due to not operating at the level of Demand 1. Why does the DWL persist? a. The firm would like to charge different prices b. Operating at the level of demand would not result in as much profit 2. Price Discrimination a. Perfect Price Discriminations. i. Everyone pays exactly their MV ii. The MR curve can overlap the Demand curve 1. MR=D b. Ordinary Price Discrimination i. Arises when the firm thinks it can divide the market into more than one piece
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Unformatted text preview: 1. Market Segmentation a. Demand changes based on how much people are willing and able to pay b. They want to produce at the intersection of the MR curves of both their markets i. Producing at that point equalizes the MR of both markets ii. Exmp. Airline Tickets 1. people who are on vacation have a elastic demand curve, if the tickets are too much, you’ll change your plans and go somewhere else 2. Business people don’t have as much options, so they have a more Inelastic demand curve c. Identification i. How do the businesses know how much you’d be willing to pay? 1. Identification features: a. Movie theaters can charge different prices based on age b. Age c. Race 2. Arbitrage a. Consumers undermining the work of the business 3. Multiple pricing a. Exmp: State Fair i. It costs to get in ii. Once you’re in, it still costs to ride the rides etc....
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