Different Prices for Different Buyers In the real world people often pay

Different prices for different buyers in the real

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offers no moral evaluation of what prices should be. Different Prices for Different Buyers In the real world, people often pay different prices for the same good. In the supply and demand model, the equilibrium price is a single, unique price that is paid by all buyers and received by all sellers. There may be different prices for different buyers and sellers because of transactions costs. Transactions costs are costs associated with gathering information about markets (prices and quantities supplied) for consuming or producing. Organizing, negotiating, and searching take time and involve opportunity costs. Firms are organized to reduce transactions costs on the producing side. For consumers, the existence of transactions costs means that different people may pay different prices for the same good or service. A familiar example of such price differences is that gas stations next to expressways charge higher prices for gasoline than do stations farther away from expressways. Why? Transactions costs. Most users of an expressway are unfamiliar with the area and are in a hurry. They perceive the cost of searching for a lower price to be higher than the potential saving produced by such searching. Think about what gas prices might be in a retirement community. Do you think there would be lower and more uniform gas prices in and around a retirement community because the opportunity cost of the customers' time is lower? If you live near a retirement community, you might want to check on the prices charged for gasoline in nearby areas. Evaluating the Market Process: In Lesson 2, you saw that each and every economy must address three basic questions: 'what', 'how' and 'for whom'? Supply and demand–the market process–provide important signals to inform, direct, and motivate economic agents in answering these questions. Functions of Prices Prices play a central role in a market system in allocating scarce resources and answering the basic economic questions. The primary functions of prices are to inform, direct, and motivate consumers and business firms. Market prices condense a great deal of complex information into a simple form. This condensed information is useful to consumers and producers in making decisions. An increase in demand causes a market price to rise. The supplier of a product does not have to know what caused demand to change. All suppliers need to know is that the price has risen. They will respond by increasing the quantity supplied. Likewise, consumers do not need to understand anything about the production process or the associated costs. All they need to know is the market price. If the price rises, consumers decrease the quantity demanded. The market price, then, provides all participants in the market with up-to-the-minute information on the relative scarcity of goods.
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