Final answer:
Retailers often practice psychological pricing, using prices that appear cheaper to influence customer perception. The term 'consumer surplus' describes the benefit to shoppers when they pay less than what they are willing to pay for a product.
Step-by-step explanation:
When retailers use prices that end in certain numbers, believing that their customers will perceive these prices as significantly cheaper, they are engaging in a practice known as psychological pricing. This strategy is based on the idea that certain price points have a psychological impact.
Retailers may use prices ending in .99 or .95 to suggest a bargain or convey the impression that the product is less expensive than it actually is. Consumers might see a price of $9.99 and perceive it as being much closer to $9 rather than $10, thereby considering it a good deal. This pricing strategy is applied across various industries, and the presumed effect on consumer behavior has been extensively studied in the field of behavioral economics.
An economist might use the term 'consumer surplus' to describe what happens when a shopper gets a good deal on a product. Consumer surplus occurs when the price that consumers pay for a product is less than the price they are willing to pay, therefore the surplus is the difference between the willingness to pay and the actual price paid.