3.7 Price Discrimination

Question 1

What is a consumer surplus?

Answer 1

A measure of the economic welfare enjoyed by a consumer: surplus utility received over and above the price paid for a good

Question 2

How is consumer surplus shown on a graph?

Answer 2

Below the demand curve and above the price line

Question 3

What is a producer surplus?

Answer 3

A measure of the economic welfare enjoyed by a firm’s or producers: the difference between the price a firm succeeds in charging and the minimum price it would be willing to accept

Question 4

How is producer surplus shown on a graph?

Answer 4

Above the supply curve and below the price line

Question 5

What is price discrimination?

Answer 5

Charging different prices to different customers for the same product or service, with the prices based on different willingness to pay

Question 6

What is first degree price discrimination?

Answer 6

When the firm is able to charge the maximum possible price to individual consumers

Question 7

What is second degree price discrimination?

Answer 7

The firm is able to charge the maximum possible price to different groups of consumers, based on quantity demanded

Question 8

What is price third degree price discrimination?

Answer 8

The firm identifies groups of consumers with similar characteristics

Question 9

What are the conditions for price discrimination?

Answer 9

• It must be possible to identify different groups of customers or submarkets
• At any price, the different groups of customers must have different price elasticities of demand
• The market must be separated to prevent seepage. This takes place when customers buy at a cheaper price and resell in another submarket which undercuts the firm’s own prices