Question

What information do prices communicate? How much information can we deduce about consumer preferences from prices? What does price discrepancy communicate? How can a firm use price discrepancy to find profit opportunity?

Answer 1

Price communicate information regarding the behavior of the consumer .If the price is high and good is normal then any increase in price would pool the demand down. We can not deduct much information about the consumer behavior from the price because price is dependable factor .It is dependent on demand of the good, demand of the substitute and complimentary good, consumer's income and choices.

Price discrepancy comunicate difference in price due to elasticity of demand . Producer can charge different price from different consumer in different areas .Firm can increase its profit by simply charging higher price where demand is inelastic and lower price where demand is elastic .