Wednesday, April 20, 2005

Prices, where do they come from?

We take it for granted that cars and houses are expensive, while hamburgers and sodas
are far less expensive. You may say "Well thats easy, it costs more to make a car than it does to
make a hamburger!". But can you say the same for McDonalds' morning coffee that is cheaper for
senior citizens than it is for others? Does it cost less to prepare coffee for a senior citizen than it does for a 20 year old? The idea that Mcdonalds' is using is that senior citizens are often retired and can afford to congregate in the morning and buy lots of coffee, while the younger folks only have time to buy a cup on their way to work. This is known as price discrimination, but don't let the word discrimination scare you; it is a regular part of economics. That's why matinees are cheaper than a night movie; there is less a demand in the day time so the theater
lowers its prices to attract customers. Once again, you see that it doesn't cost the theater any more to play a movie at night, its just that more people go to the movie at night.

Moral of the story: Prices aren't "set" by any company, person, or entity; they are based on reality of circumstances.