Demand and Elasticity Review PDF

**WEEK 5:** **DEMAND AND ELASTICITY** **Elasticity:** The measure of Responsiveness "A high cross elasticity of demand (between two goods indicates that they) compete in the same market. (This can prevent a supplier of one of the products) from possessing monopoly power over price". - The **pr...

**WEEK 5:** **DEMAND AND ELASTICITY** **Elasticity:** The measure of Responsiveness "A high cross elasticity of demand (between two goods indicates that they) compete in the same market. (This can prevent a supplier of one of the products) from possessing monopoly power over price". - The **price elasticity of demand** is the ratio of the percentage change in quantity demanded to the percentage change in price that brings about the change in quantity demanded. - A **demand curve** is elastic when a given percentage price change leads to a larger percentage change in quantity demanded. A demand curve is in-elastic when a given percentage price change leads to a smaller percentage change in quantity demanded. **WHAT DETERMINES PRICE ELASTICITIES OF DEMAND?** 1. **Nature of the Good** -  items that satisfy human wants, provide utility or usefulness, and are scarce (have limited availability). 2. **Availability of Close Substitutes** - a major factor in determining its price elasticity of demand \- If consumers can substitute the good for other readily available goods that consumers regard as similar, then the price elasticity of demand would be considered to be elastic. 3. **Share of Consumers Budget** - the ratio of a consumer\'s expenditure on a particular commodity to their total household resources. 4. **Passage of time** - increases the elasticity of demand for many goods **PRICE ELASTICITY OF DEMAND: ITS EFFECT ON TOTAL REVENUE AND TOTAL EXPENDITURE** A firms **revenue** is the money that it receives in exchange for the goods it sells, and is calculated by multiplying the quantity sold times the price at which the good are sold. Customers **expenditure** on good is the money they pay in exchange for the goods they buy and is calculated by multiplying the quantity purchase times the price at which the goods are bought. Because every sale must involve some customers purchase a firms revenue is equal to its customers expenditures. **Elasticity As A General Concept** **INCOME ELASTICITY -** measures how responsive the demand for a product is to changes in consumer income **PRICE ELASTICITY OF SUPPLY -** the responsiveness of a supply of a good or service after a change in its market price **CROSS ELASTICITY OF DEMAND -**  an economic concept that measures how the price of one good affects the quantity demanded of another good. **Substitutes -** The more substitutes, the higher the elasticity, as people can easily switch from one good to another if a minor price change is made **% of Income -** The higher the percentage that the product\'s price is of the consumers income, the higher the elasticity, as people will be careful with purchasing the good because of its cost **Necessity -** The more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of insulin for those that need it. **Duration** - The longer a price change holds, the higher the elasticity, as more and more people will stop demanding the goods (i.e. if you go to the supermarket and find that blueberries have doubled in price, you\'ll buy it because you need it this time, but next time you won\'t, unless the price drops back down again) **Breadth of Definition** - The broader the definition, the lower the elasticity. For example, Company X\'s fried dumplings will have a relatively high elasticity, where as food in general will have an extremely low elasticity - **COMPLEMENTS** - products that are used or consumed together, and their demand is related:  - **SUBSTITUTES** - a product or service that consumers can use in place of another because they are similar or serve the same purpose: - **CROSS ELASTICITY OF DEMAND -** an economic concept that measures how the price of one good affects the quantity demanded of another good 1. **Buyer's Income** - the amount of money a consumer has to spend on goods and services. EX: Examples: Minimum wage increases, Economic Recession, The Great Depression 2. **Price of Substitute Goods** - Goods or services that can be used instead of other goods or services, causing a change in demand. Ex: Pepsi and cola 3. **Market Size** - the total potential demand for a product or service in a given market. Ex: Immigration, Detroit after collapse of auto industry 4. **Consumer Tastes** - The popularity of a good or service has a strong effect on the demand for it, and in the marketplace, popularity can change quickly. Ex: Monopoly 5. **Consumer Expectations** - What you expect prices to do in the future can influence your buying habits today. Ex: HD TV's, PS3, Gasoline, Homes, Automobiles 6. **Complement Goods** - When the use of one product increases the use of another product. Ex: dvd and tape **Supply** - The desire, ability, and willingness to offer products for sale \*Anyone who offers an economic product for sale is a supplier \*When you work at your job, you are offering your services for sale. Your economic product is labor. You would probably supply more for a higher wage. **Law of Supply** - as the price of a good or service increases, the quantity of goods or services increases, and vice versa. **Non-Price Determinants of Supply** 1. **Number of Products** - A successful new product or service always brings out competitors who initially raise overall supply. 2. **Input Costs** - Input costs, the collective price of resources that go into producing a good or service, affect supply directly. Ex: Minimum Wage increases, Cost of cotton increases, supply of t-shirts decreases 3. **Labor Productivity** - Better trained or more-skilled workers are usually more productive. Increased productivity decreases costs and increases supply. 4. **Technology** - By applying scientific advances to the production process, producers have learned to generate their goods or services more efficiently. 5. **Government Action** - Government actions, such as taxes or subsidies, can have a positive or negative effect on production costs. 6. **\# of Sellers** - \# of sellers increases, supply increases, \# of sellers decreases, supply decreases. Ex: McDonald's Plans to Open 1,000 new stores in 2010, All Circuit City stores in America went out of business 7. **Producer Expectations** - The amount of a product that producers are willing and able to supply may be influenced by whether they believe prices will go up or down. **WEEK 6:** **OUT PRICE AND PROFIT: THE IMPORTANCE OF MARGINAL ANALYSIS** Business is a good game\... You keep score with money. UNOLAN BUSNELL, FOUNDER OF ATARI (AN EARLY VIDEO GAME MAKER) An **Optimal decision** is the one that best serves the objectives of the decision maker, whatever those objectives may be. It is selected by explicit or implicit comparison with the possible alternative choices. The term optimal connotes neither approval nor disapproval of the objective itself. **6-1 Price and quantity: One decision, not two** Each point on the demand curve represents a price-quantity pair. The firm can pick any such pair. It can never pick the price corresponding to one point on the demand curve and the quantity corresponding to another point, however, because such an output cannot be sold at the selected of price. in one case, the relation between market demand and firm demand is very vary. That the case where the firms bar so competitors- it is a monopoly, Because it has the entire market to itself its demand curve and the market demand curve are one and the same. **6-2 Total profit: Keep your eye on the goal** - **Total profit,** then, is the firm\'s assumed goal. By definition, total profit is the difference between what the company earns. it in the form of sales revenue and what it pays out in the form of costs: - The total profit of a firm is its net earnings during some period of time. It is equal to the total amount of money the firm gets from sales of its products (the firm\'s total revenue) minus the total amount that it spends to make and market those products (total cost). **6-3 Economic profit and optimal decision making** If, after maximizing its profits, the f**irm\'s economic profit is positive**, then the f**irm\'s decisions are optimal;** that is, it is doing better with its resources than it could in any other alternative use. If, after maximizing its profits, **the firm\'s economic profit is zero**, then the **firm\'s choices are still optimal,** because it is doing as well with its resources as it could in any other alternative use. If, after maximizing its profits, **the firm\'s economic profit is negative**, then the **choice is not optimal;** even if it uses its resources to make as much profit as possible in the sale of its output, there is at least one alternative use of its resources that is more profitable than that. **Economic profit** is the total revenue of a firm minus all of its costs, whether explicit payments or implicit opportunity costs. It equals net earnings, in the accountant\'s sense, minus the opportunity costs of capital and any other inputs supplied by the firm\'s owners. The **total revenue (TR)** of a supplier firm is the total amount of money it receives from the purchasers of its products, without any deduction of costs. *TR - P x Q* *AR - TR/Q* *P - P x Q/Q* The **average revenue (AR)** is **total revenue (TR) divided by quantity.** **Marginal revenue (MR)** is the addition to total revenue resulting from the addition of one unit to total output. Geometrically, marginal revenue is the slope of the total revenue curve at the pertinent output quantity. Its formula is *MR, = TR, - TR,* and so on. **Marginal profit,** is the addition to total profit resulting from one more unit of output. **Producer\'s surplus** is the difference between the market price of the item sold and the lowest price at which the seller would be willing to provide that item, which is that unit\'s marginal cost. [Marginal Analysis and Maximization of Total Profit] **MARGINAL PROFIT** - is the addition to total profit resulting from one more unit of output. An output decision cannot be optimal unless the corresponding marginal profit is zero. Economic profit is the total revenue of a firm minus all of its costs whether explicit payments or implicit opportunity costs. It equals net earnings, in the accountant\'s sense. minus the opportunity costs of capital and any other inputs supplied by the firm' owners [The marginal rule for finding the optimal level of output:] If the marginal profit from increasing output by one unit is **POSITIVE,** then output should be increased. If the marginal profit from increasing output by one unit is **NEGATIVE**, then output should be decreased. Thus, an output level can maximize total profit only if marginal profit is neither positive nor negative\-- that is, if it equals zero at that output. **WEEK 7:** **THE FIRM AND THE INDUSTRY UNDER** **PERFECT COMPETITION** **Perfect competition** occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there is no impediment to the entry or exit of firms, and when full information is available. [PERFECT COMPETITION DEFINED] 1\. **NUMEROUS SMALL FIRMS AND CUSTOMERS** - Competitive markets contain so many buyers and sellers that each one constitutes a negligible portion of the whole-so small, in fact, that each player\'s decisions have no perceptible effect on price. This requirement rules out trade associations or other collusive arrangements in which firms work together to influence price. 2\. **HOMOGENEITY OF PRODUCT** - The product offered by any seller is identical to that supplied by any other seller. (E.g., No. I red winter wheat is a homogeneous product; different brands of toothpaste are not.) Because products are homogeneous, consumers do not care from which firm they buy and only look for the lowest price, so competition is more powerful. 3\. **FREEDOM OF ENTRY AND EXIT** - New firms desiring to enter the market face no impediments that previous entrants can avoid, so new firms can easily come in and compete with older firms. Similarly, if production and sale of the good prove unprofitable, no barriers prevent firms from leaving the market. 4\. **PERFECT INFORMATION** - Each firm and each customer is well informed about available products and prices. They know whether one supplier is selling at a lower price than another. **PERFECT COMPETITION -** occurs in an industry when that industry is made up of many small firms producing homogeneous products, when there is no Impediment to the entry or exit of firms, and when full information is available. [THE PERFECTLY COMPETITIVE FIRM] Under perfect competition, the firm has no choice but to accept the price that has been determined in the market. It is, therefore, called a **\"price taker\"** (rather than a \"price maker\"). The idea that no firm in a perfectly competitive market can exert any control over product price follows from our stringent definition of perfect competition. The presence of a vast number of competitors, each offering identical products, forces each firm to meet but not exceed the price charged by the others, because at any higher price all of the firm\'s customers would leave it and move their purchases to its rivals. A perfectly competitive firm faces a **horizontal demand curve.** This means that it can sell as much as it wants at the prevailing market price. It can double or triple its sales without reducing the price of its product. Under perfect competition, the firm\'s **demand, average revenue**, and **marginal revenue** are all the same. A **variable cost** is any cost of the firm\'s operation that depends on the firm\'s level of output. The **supply curve** of the perfectly competitive firm shows the different quantities of output that the firm would be willing to supply at different possible prices during some given period of time. **Economic profit** is the total revenue of a firm minus all of its costs, whether explicit payments or implicit opportunity costs. It equals net earnings, in the accountant\'s sense, minus the opportunity costs of capital and any other inputs supplied by the firm\'s owners. [Short-Run Equilibrium for the Perfectly Competitive Firm] If the price does not depend on how much the firm sells (which is exactly what a horizontal demand curve means), then each additional unit sold brings in an amount of additional revenue (the marginal revenue) exactly equal to the market price. So marginal revenue always equals price under perfect competition because the firm is a price taker.! Under perfect competition, the firm\'s demand, average revenue, and marginal revenue are all the same. Because it is a price taker, the profit-maximizing equilibrium of a firm in a perfectly competitive market must occur at an output level at which marginal cost equals price = AR = MR. This is because a horizontal demand curve makes price and MR equal and, therefore, both must equal marginal cost according to the profit-maximizing principle. In symbols: MC = MR = P [SHUT DOWN ANALYSIS] Of course, any firm will accept only a limited amount of loss before it stops production. If losses get too big, the firm can simply go out of business. But sometimes it will benefit the firm to continue to operate for a while because of costs that it will still have to pay even if its production ceases. To understand the logic of the choice between shutting down and remaining in operation, at least temporarily to help cover losses, we must return to the distinction between variable costs, that is, those that are variable in the short run and those that are fixed. **8-THE CASE FOR FREE MARKETS: THE PRICE SYSTEM** If there existed the universal mind that \... would register simultaneously all the processes of nature and of society, that could forecast the results of their inter reactions such a mind.. could.. draw up a faultless and an exhaustive economic plan\..... In truth, the bureaucracy often conceives that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market. **LEON TROTSKY, A LEADER OF THE RUSSIAN REVOLUTION** **8-1 EFFICIENT RESOURCE ALLOCATION AND PRICING** The fundamental fact that inputs are scarce means that there are limits to the volume of goods and services that any economic system can produce. **Efficient allocation -** of resources is one that takes advantage of every opportunity to make some individuals better off in their own estimation while not worsening the lot of anyone else. **8-2 SCARCINAND THE NEED TO COORDINATE ECONOMIC DECISIONS** efficiency becomes a particularly critical issue when we concern ourselves with the workings of the economy as a whole, rather than with narrower topics such as choosing among commuting routes or deciding on the output of a single firm. We can think of an economy as a complex machine with literally millions of component parts. If this machine is to function efficiently, we must find some way to make the parts work in harmony. \- In a planned or centrally directed economy, we can imagine how such coordination might take place-though implementation is far more difficult than conception. Central planners would set production targets for firms and sometimes tell firms how to meet these targets. In extreme cases, consumers may even be told, rather than choose, what they are -allowed to consume. Adam Smith\'s invisible hand uses prices to organize the economy\'s production. **8-2a Three Coordination Tasks in the Economy** Three basic questions of resource allocation: **Output selection**. How much of each commodity should be produced, given limited supplies of the needed input resources? **Production planning.** What quantity of each of the available inputs should be used to produce each good? **Distribution.** How should the resulting products be divided among consumers? The method of economic organization that Laissez-faire refers to a eighteenth-century French economists named **laissez-faire.** situation in which there is minimal government **Under laissez-faire**, the government acts to prevent crime, interference with the workings enforce contracts, and build roads and other types of public of the market system. The term works; it does not set prices, however, and interferes as little implies that people should be as possible with the operation of free markets. **Laissez-faire** refers to a situation in which there is minimal government interference with the workings of the market system. The term implies that people should be left alone in carrying out their economic affairs. **Under laissez-faire,** the allocation of society\'s resources among different products depends on consumer preferences (demands) and the production costs of the goods demanded. **Output Selection -** A market system decides what should be produced via what we have called the \"law\" of supply and demand. Where there is a shortage (i.e., where quantity demanded exceeds quantity supplied), the market mechanism pushes the price upward, thereby encouraging more production and less consumption of the commodity in short supply. Where a surplus arises (i.e., where quantity supplied exceeds quantity demanded), the same mechanism works in reverse: the price falls, discouraging production and stimulating consumption, **Production Planning -** Once the market has decided on output composition, the next coordination task is to determine just how those goods will be produced. The production-planning problem includes, among other things, the division of society\'s scarce inputs among enterprises. Which farm or factory will get how much of which materials? How much of the nation\'s labor force? How much of the produced inputs such as plant and machinery? Such decisions can be crucial. If a factory run short of an essential input, the \- In reality, no economic system can select inputs and outputs separately. The input distribution between the production of cars and the manufacture of washing machines determines the quantities of cars and washing machines that society can obtain. However, it is simpler to think of input and output decisions as if they occur one at a time. -In a free market, inputs flow to the firms that can make the most productive (most profitable) use of them and are willing to pay the most for them. Firms that cannot make a sufficiently productive use of some input will be priced out of the market for that item. **Distribution of Products among Consumers -** The third task of any economy is to decide what consumer gets which of the goods that have been produced. Because the output required from any one industry depends on outputs from many other industries, planners can be sure that the production of the various outputs will be sufficient to meet both consumer and industrial demands only by taking explicit account of this interdependence among industries. If they change the output target for one industry, they must also adjust the targets for many other industries. But those changes in turn are likely to require readjustment of the first target change that started it all, leading to still more target change requirements, and so on, indefinitely. **Input-output analysis -** is a mathematical procedure that takes account of the interdependence among the economy\'s industries and determines the amount of output each industry must provide as inputs to the other industries in the economy. **Consumer\'s surplus -** from a purchase is equal to the difference between the maximum amount the consumer would be willing, if necessary, to pay for the item bought and the price that the market actually charges. \- The consumer\'s surplus from a purchase is equal to the difference between the maximum amount consumer would be willing, if necessary, to pay for the item bought and the price that the market actually charges. In a purchase by a rational consumer, the surplus will never be a negative number, because if the price is higher than the maximum amount the potential purchaser is willing to pay, he will simply refuse to buy it. **Producer\'s surplus -** is the difference between the market price of the item sold and the lowest price at which the seller would be willing to provide that item, which is that unit\'s marginal cost. **8-4 HOW PERFECT COMPETITION ACHIEVES EFFICIENT OUTPUT: MARGINAL ANALYSIS** There is a second way to look at the efficiency of output levels under perfect competition\'s idealized circumstances, this time relating the discussion directly to the definition of efficiency given at the beginning of this chapter. Because a detailed proof of this assertion for three coordination tasks is long and time-consuming, we will present the proof only for the task we have just been considering-output selection. But similar logic can be used - to show that perfect competition also leads to the efficient allocation of inputs to different production activities, and to efficient distribution of goods and services among consumers. We will show that, at least in theory, perfect competition does guarantee efficiency in determining the relative quantities of the different commodities that the economy produces. The proof comes in two steps. **First**, we derive a criterion for efficient output selection-that is, a test that tells us whether production is being carried out efficiently. **Second**, we show that the prices that emerge from the market mechanism under perfect competition automatically pass this test. **Step 1: Rule for Efficient Output Selection** We begin by stating the rule for efficient output selection: \- Efficiency in the choice of output quantities requires that, for each of the economy\'s outputs, the marginal cost (MC) of the last unit produced be equal to the marginal utility (MU) of the last unit consumed.\' **In symbols:** MC = MU **Step 2: The Price System\'s Critical Role** Next, we must show that under perfect competition, the price system automatically leads buyers and sellers to behave in a way that equalizes MU and MC. When all prices are set equal to marginal costs, the price system gives correct cost signals to consumers. It has set prices at levels that induce consumers to use society\'s resources with the same care they devote to watching their own money, because the money cost of a good to consumers has been set equal to the opportunity cost of the good to society. A perfectly analogous explanation applies to the decisions of producers. 9: **MONOPOLY** "price maker" The price of monopoly is upon every occasion the highest which can be got. **[ADAM SMITH]** **9-1: MONOPOLY DEFINED** A **pure monopoly** is an industry in which there is only one supplier of a product for which there are no close substitutes and in which it is very difficult or impossible for another firm to coexist. The definition of pure monopoly has rather stringent requirements. **First**, only one firm can be present in the industry-the monopolist must be \"the only game in town\" **Second**, no close substitutes for the monopolist\'s product may exist. **Third**, there must be a reason why entry and survival of potential competitors is extremely unlikely. Otherwise, monopolistic behavior and its excessive economic profits very could not persist. [If we do not study pure monopoly for its descriptive realism, why do we study it?] Because, like perfect competition, **pure monopoly** is a market form that is easier to analyze than the more common market structures. Thus, **pure monopoly** is a stepping-stone toward more realistic models. **9-1a: Sources of Monopoly: Barriers to Entry and Cost Advantages Barriers to entry** are attributes of a market that make it more difficult or expensive for a new firm to open for business than it was for the firms already present in that market. 1. **Legal Restrictions -** The U.S. Postal Service has a monopoly position for some of its services because Congress has given it one. Private companies that may want to compete with the by law. Local postal service directly in those services are prohibited from doing monopolies of various kinds are sometimes established either because government grants by municipal stadium) or prevents other firms from entering the industry. A **patent** is a privilege a granted to an inventor, I whether an individual or a firm, that for a specified period of time prohibits anyone else from producing or using that invention without the permission of the holder of the patent. 2. **Patents** Some firms benefit from a special, but important, class of legal impediments to entry called patents. To encourage innovation, the government gives exclusive production rights for a period of time to the inventors of certain products. As long as a patent is in effect, the firm has a protected position, which may make it a monopoly. 3. **Control of a Scarce Resource or Input -** If a certain commodity can be produced only by using a rare input, a company that gains control of the source of that input can establish a monopoly position for itself. 4. **Deliberately Erected Entry Barriers -** A firm may deliberately attempt to make entry into the industry difficult for others. 5\. **Large Sunk Costs Entry -** into an industry will, obviously, be very risky if it requires a large investment, especially if that investment is sunk-meaning that it cannot be recouped for a considerable period of time, if at all. the need for a large sunk investment discourages entry into an industry. Many analysts, therefore, consider sunk costs to be the most important type of **\"naturally imposed\"** barrier to entry. 5. **Technical Superiority -** A firm whose technological expertise vastly exceeds that of any potential competitor can, for a period of time, maintain a monopoly position. 6. **Economies of Scale -** If mere size gives a large firm a cost advantage over a smaller rival, it is likely to be impossible for anyone to compete with the largest firm in the industry. This of cost advantage is important enough to merit special attention. **9-1b: Natural Monopoly** is an industry in which advantages of large-scale production make it possible for a single firm to produce the entire output of the market at lower average cost than a number of firms each producing a smaller quantity. A **monopoly** need not be a large firm if the market is small enough. What matters is the size of a single firm relative to the total market demand for the product. There are **two basic reasons** why a monopoly may exist: **barriers to entry**, such as legal restrictions and patents, and **cost advantages of superior technology** **or large scale operation** that lead to natural monopoly. It is generally considered undesirable to break up a large firm whose costs are low because of scale economies. But barriers to entry are usually considered what lead to natural monopoly from to be against the public interest except where they are believed to offer offsetting advantages, as in the case of patents, which are designed to encourage invention. **9-2: THE MONOPOLIST\'S SUPPLY DECISION** A monopoly firm does not have a \"supply curve,\" as we usually define the term. Unlike a firm operating under perfect competition, a monopoly is not at the mercy of the market; the firm does not have to accept the market\'s price as beyond its control and adjust its output level to that externally fixed price, as the supply curve assumes. Instead, it has the to set the price, or rather to select the price-quantity combination on the demand curve that suits its interests best. The market cannot impose a price on a monopolist as it imposes a price on the price-taking perfectly competitive firm. But the **monopolist** cannot select both price and the quantity it sells. **9-2b: Comparing Monopoly and Perfect Competition** Before making our comparison, we must note that, under monopoly, the firm and the industry are exactly the same entity, while under perfect competition, any one firm is just a small portion of the industry. It is self-evident and not very interesting to observe that the output of the monopolist is virtually certain to be larger than that of a tiny competitive firm. **1. Monopoly Restricts Output to Raise Short Run Price -** The monopolist produces less that the competitive market in the short run, and charges a higher price than the competitive Price. **2. Monopoly Restricts Output to Raise Long-Run Price -** The second thing we observe in Figure1 is that the monopolist produces less and charges a higher price than the competitive market in the long run as well. 3. **A Monopolist\'s Profit Persists -** The third difference between competition and monopoly is barriers to entry in monopoly. Note that, in the short run, the firms in this perfectly competitive industry do make an economic profit **4. Monopoly Leads to Inefficient Resource Allocation -** We have seen that a monopoly will charge a higher price and produce a smaller output than will a competitive industry with the same demand and cost conditions. **The deadweight loss (efficiency loss)** of monopoly is the lost producer and consumer surplus that occurs when a monopolist produces less than the efficient quantity of a product. **9-3b: Natural Monopoly: Where Single-Firm Production Is Cheapest** **Second**, we must remember that the monopoly depicted in Figures 2 and 3 is not a natural monopoly, because its average costs increase rather than decrease when its output expands. However, some of the monopolies you find in the real world are \"natural\" ones. Where a monopoly is natural, costs of production would, by definition, be higher---possibly much higher-if the single large firm were broken up into many smaller firms. (Refer back to Figure 1.) In such cases, it may serve society\'s interests to allow the monopoly to continue because consumers benefit from the economies of large-scale production. But then it may be appropriate to regulate the monopoly by placing legal limitations on its ability to set its prices. **Price discrimination -** is the sale of a given product at different prices to different customers of the firm when there are no differences in the costs of supplying these customers. Prices are also discriminatory if it costs more to supply one customer than another but they are charged the same price When a firm charges discriminatory prices, profits are normally higher than when the firm charges nondiscriminatory (uniform) prices because the firm then divides customers into separate groups and charges each group the price that maximizes its profits from those customers. **9-4a: Is Price Discrimination Always Undesirable?** Although the word discrimination is generally used to refer to reprehensible practices, price discrimination may not always be bad. Most people feel strongly that it is appropriate for the post office to charge the same price for all first-class letters going between two points in the United States, regardless of the differences in delivery costs. Similarly, most people approve of discounts on theater tickets sold to students or to senior citizens, even though those prices are obviously discriminatory. The same is widely agreed about lower doctor\'s fees for needy patients. Other reasons, in addition to some standard of fairness or justice, may provide a defense for price discrimination in certain cases. It is even possible that price discrimination can make a product cheaper than it would otherwise be for all customers- even those who pay the higher discriminatory prices. As you may imagine, this can be true only if the production of the commodity involves significant economies of scale. The conclusion from this discussion is not that price discrimination is always a good thing, but rather that it is sometimes desirable. In particular, we must recognize that a firm maybe unable to cover its cost without price discrimination a situation that some observers consider to be relatively common. **MONOPSONY: THE CASE OF A SINGLE BUYER** A market with only one buyer is called a **monopsony**. Is in many ways the mirror image of a monopoly. While a **monopolist** restricts sales in order to drive the price it receives up a **monopsonist** restricts purchases in order to drive the price that it is paying down. [In the case of monopoly], the product being sold can have no close substitutes; otherwise, the monopolist\'s price increase will be self-defeating as buyers switch to substitutes. Similarly, for a market to be a true **monopsony**, the product being bought must have little or no other use. Otherwise, when the **monopson**. buyer tries to force its price down, the producers will simply sell it to other buyers for other uses, Finally, like a **monopolist**, a **monopsonist** requires a barrier to entry if their excess profits are going to persist. A **monopsony** is an industry in which there is tttttttttttttttttttttttttttttttttttttttttttt6666666666