User blog:GreatLogos/Econ Notes (18-11-2013)

The willingness to pay (WTP) of a buyer is pretty self-explanatory; it is an amount, expressed in currency, that describes how much a buyer is willing to pay for a product. The consumer surplus - abbreviated in economics terms as CS - is the difference between the buyer's WTP and their acquisition price.

A firm can practice perfect price discrimination if it can sell products to its buyers such that each buyer pays an amount equivalent to his or her WTP. In the real economy, this is extremely difficult because WTP is not easily quantified and easily changes. In LOC, however, buyers are usually subject to perfect price discrimination because aggregate demand severely exceeds aggregate supply, making it easy for sellers to move their product at the WTP of buyers (individual demand is influenced and nearly congruent to aggregate demand).

Because of the simplicity of LOC's economy, it is very easy to approximate LOC markets to hypothetical/model markets, and as a result perfect price discrimination becomes very easy.