All Or Nothing Demand Curve Homework Help

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The All Or Nothing Demand Curve

The all or nothing demand curve is a concept in which a company or a firm may be able to get to the right of the original demand curve to an altogether new demand curve. The All or Nothing Demand Curve is a curve that is actually made by calculating the average revenue generated by a firm for a given output level. This can be done only in the case where it can price discriminate.

 

Figure 1 All-Or-Nothing Demand Curve

To make this clearer, let us consider an example of the curve in the figure. Let us consider a firm. This firm charges $7 for one piece of the product they are selling. The average price at this output for a unit would be $7. But you can see that for a quantity of 2 units, the price for the first unit would be at $7 and that of the second one would be reduced to six dollars. Hence the total price at which they are sold would be only 13 dollars, making the average per unit to be 6.5 dollars and not the original 7 dollars.

When the firm does this case, the firm would want to get the maximum possible profits it can and hence would start selling its product in a group of two units. This would make it get 6.5 dollars per piece on an average.

 

At the higher number of units:

In case there are 3 units being sold, the total money collected by the firm would be only 18 dollars. This means that the average price per unit would be only 6 dollars. This way under perfect price discrimination, the firm would be able to make 6 dollars per unit. In order to keep up with this price, the firm would try to sell it at the rate of an average per unit of 6 dollars, by selling it in batches of three.

This way, with increasing number of units, there would be a decreased income for the firm, which is when they need to go in for the all or nothing demand curve and decide their limits for the quantity.

 

A famous example:

There is one good example to make this more understandable. Disneyland, before it started charging the same price from all the customers, it followed this principle based on the all or nothing demand curve. It was a custom for it to charge people only for the rides they play. They were allowed to get tickets only to those rides in which they wanted to go.

Now that it charges an all or nothing far from its customers, the customers get to play on all the rides that they want to. This means there is unlimited access for the customers to all the rides inside their amusement park. The theme park may actually set the price on the basis of the all or nothing demand curve. This way it would be very easy for it to gain the entire surplus from the consumers for itself. A small bit goes a long way.

 

All or Nothing Demand Curve Homework Help