Category: Micro Economics

Game Theory

Key Concepts A game is any situation in which players (the participants) make strategic decisions—i.e., decisions that take into account each other’s actions and responses. Payoffs are the value associated with a possible outcome. A strategy is a rule or plan of action for playing the game. Optimal strategy is the strategy that maximises a player’s …

Input Output Analysis

Introduction In its “static’ version, Professor Leontief’s input-output analysis deals with this particular question: “What level of output should each of the n industries in an economy produce, in order that it will just be sufficient to satisfy the total demand for that product?” The rationale for the term input-output analysis is quite plain to see. …

The two-part tariff

The two-part tariff is related to price discrimination and provides another means of extracting consumer surplus. It requires consumers to pay a fee up front for the right to buy a product. Consumers then pay an additional fee for each unit of the product they wish to consume. The classic example of this strategy is an …

Peak-load pricing

Peak-load pricing also involves charging different prices at different points in time. Rather than capturing consumer surplus, however, the objective is to increase economic efficiency by charging consumers prices that are close to marginal cost. For some goods and services, demand peaks at particular times—for roads and tunnels during commuter rush hours, for electricity during late …

Intertemporal price discrimination

Two other closely related forms of price discrimination are important and widely practiced. The first of these is inter-temporal price discrimination: separating consumers with different demand functions into different groups by charging different prices at different points in time. The second is peak-load pricing: charging higher prices during peak periods when capacity constraints cause marginal costs …

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