Short notes on managerial implications: peak-load pricing; the backward-bending supply curve of labour

(i) Peak-load pricing

Meaning. Some goods and services cannot be stored and are supplied from a fixed capacity, while demand swings sharply between peak and off-peak periods: electricity, telephone networks, airlines, hotels, cabs and car rentals. Peak-load pricing charges a higher price in the peak period, when demand presses on capacity, and a lower price off-peak, when capacity is idle.

Logic. Off-peak, capacity is spare, so the cost of serving one more customer is only the running (marginal operating) cost, and price should cover that. At the peak, capacity is fully used; serving more customers would need more capacity, so the peak price should also cover the cost of capacity.

Diagram. Draw quantity along the horizontal axis and price up the vertical axis, with a single marginal cost curve MC that slopes upward because cost per unit climbs as output presses on capacity. Two demand curves sit against it: a high one for the busy period, Dₚ, with marginal revenue MRₚ, and a lower one for the slack period, Dₒ, with marginal revenue MRₒ. The firm treats the two periods as separate pricing problems and settles each where that period's own marginal revenue curve cuts MC:

This is not ordinary third-degree discrimination, in which one product is sold in two markets and marginal revenue is equalised between them. Here the two periods are met at different points on the MC curve, at different marginal costs, so MRₚ and MRₒ need not be equal.

Managerial implications

1. Better use of capacity: lower off-peak prices shift some demand into slack periods, raising utilisation.
2. Less need for new capacity: flattening the peak postpones costly expansion of plant, fleet or network.
3. Higher revenue: charging more when demand is least elastic raises revenue per unit of capacity.
4. Rationing at the peak: a higher price allocates scarce capacity to those who value it most, reducing queues and overloads.
5. Communication matters: customers must understand and accept the price differences; surge pricing that looks exploitative can damage the brand. Example (our own): a car-rental firm in Goa charging more over the New Year week and offering discounts in the monsoon months; electricity tariffs by time of day.

(ii) The backward-bending supply curve of labour of an individual

Meaning. An individual divides 24 hours between work and leisure. A higher wage has two effects:

• Substitution effect: leisure becomes costlier (each hour not worked gives up more income), so the worker substitutes work for leisure and works more.
• Income effect: at a higher wage the worker is richer; leisure being a normal good, she wants more leisure, so she works less.

At low wages the substitution effect is stronger, so hours of work rise with the wage. Beyond a certain wage the income effect becomes stronger, and further wage rises reduce hours worked. Diagram: wage on the vertical axis, hours of work on the horizontal axis; the supply curve rises up to point K and then bends back to the left: the backward-bending supply curve of labour.

Managerial implications

1. Overtime pay has limits: beyond a point, higher overtime rates may not buy more hours from the same workers; hiring more workers or adding shifts may work better.
2. Non-wage incentives: for well-paid staff, flexible hours, leave, recognition and career growth can motivate more than higher pay.
3. Target earners: workers who aim at a fixed income (some daily-wage and gig workers) work fewer hours when rates rise, so incentive schemes should reward output, not hours alone.
4. Workforce planning: forecasts of labour supply should allow for workers taking more leisure as incomes rise.
5. Wage negotiations: raising wages may improve retention and effort per hour even if hours fall.