Economics

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Introduction

            As an entrepreneur, I have taken a huge interest in the transport industry as such am ready to set up a taxi industry. In consequence, I acknowledge the need to recognize an investment into a conclusive market research in order to find out crucial business aspects for instance business competitors way of operation so that I can be able to choose a unique way to set up my enterprise. As a result, my market survey will focus on how the industry players maintain customer loyalty, their brands, whether it is important to invest in technology, etc (Wei, 2016). Additionally, I will be able to categorize the various customer needs, bearing in mind customers represent a huge part of my business. For that reason, my business will be able to uphold efficiency in terms of service delivery and quick solvency of customer complaints by prioritizing an open door policy to all the clientele. Hence, this essay focuses on the microeconomic theories, for example, price discrimination and price mechanism as related to demand and supply as well as the pros and cons of starting a new business.

Price discrimination Theory

            This theoretical model incorporates charging dissimilar prices to different categories of customers for the same type of service. For instance, offering discounts on student’s taxi fares, having lower off peak fares, etc. Further, price discrimination can be subdivided into three distinct categories namely, first degree, second degree, and third degree. As such first degree can be explained as charging customers the higher price they can part with willingly, therefore the business will not enjoy additional customer base. Furthermore, second degree incorporates charging dissimilar prices as per the quantity consumed, for instance after some miles the fare becomes cheaper. On the other hand, third degree incorporates charging dissimilar prices to dissimilar categories of customers for example; students can pay cheaper fare rates. Therefore, it is significant for a business practicing price discrimination to ensure the products offered are unique so that to be able to discriminate between the ability of consumers to pay. Consequently, this creates a type of indirect segmentation by presenting somewhat unusual choices; the business will have it easy when distinguishing the ability to pay.

            Also, to ensure profit maximization under price discrimination, the business will have to set output and price to depict MR=MC (Avigad, 2000). Thus, the business will increase profits by setting different prices depending upon the slope of the demand curve. For example, in regards to student customers, the price will be lower because of the elasticity of demand. Besides the advantage of price discrimination includes the business ability to increase revenue levels, price discrimination ensures continuity of a business. For example, during peak and off peak hours, without price discrimination, the business will find it impossible to offer off peak services. Contrary, the disadvantage price discrimination is it leads to reduction in consumer surplus. This is because price discrimination leads to exchange of monetary units to firms from consumers thus resulting in inequality.

Price mechanism Theory

            According to Fu (2003), a market occurs because buyers and sellers often meet to buy and sell certain services. Therefore, price mechanism can be defined as the interaction between supply and demand so that to set the market price as well as the number of services sold. However, mostly the price planned demand fails to equate to planned...