Economics Essay Example | Topics and Well Written Essays - 1500 words - 11

Economics - Essay Example This paper will examine the concept of the zero price, discussing its effects on demand and price, thereby demonstrating how price has the capacity to allocate and ration resources. The price of zero refers to the phenomenon in which the demand for a product or service is substantially more at the price of zero than a price even minimally greater than zero. On a graph, a zero price effect appears in the form of a discontinuity on the demand curve at the price of zero. In essence, the zero price effect can be considered as a special instance in the law of demand. The price of zero also encompasses a myriad of explanations that are based on psychological, behavioural and cognitive biases (Poundstone, W 2010, 75). An utterly rational justification for the zero price effect lies in the fact that when the marginal utility of extra units of consumption is positive albeit exceedingly low, lower than a nonzero unit of price (currency) can be charged feasibly (Engelson 1995, 54). Another prom inent explanation for the zero price phenomenon is the transaction costs. ... On the other hand, when purchasing something in person, the exchange of bank notes or coin is exceedingly necessary (Poundstone, W 2010, 147). These direct, as well as indirect costs exert a positive effect in terms of the effective price, especially in case of any form of nonzero price. Therefore, a real price drop to zero can ultimately represent a substantive drop in the effective price of the product or service. This problem inherent in transaction costs can be resolved through a myriad of ways, for instance, by making use of cards or accounts in the event of bulk payments that are made once before an account balance is sustained in order to keep track of other small purchases (Engelson 1995, 91). This strategy presents the most common method through which electricity, gas, phone usage, as well as other utilities are billed. The last explanation for the zero price occurrences is psychic costs. Handling and thinking about money has the potential to be quite stressful. This is beca use considering whether small items are worth small amounts of money can in itself exert a psychic cost, which can force people to steer away of considering or even making purchases. When people are faced with the option of choosing one among numerous products or end up purchasing nothing, according to perspectives provided under standard theories, it is widely acceptable that people will select the option with the greatest cost-benefit variation. However, it is evident that decisions regarding free or zero price products differ quite substantially since people typically do not merely subtract costs from the benefits offered by the product, but rather they consider the benefits linked with free products as profoundly greater (Engelson