Question

2          Give two examples of price discrimination. ? How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus?

Answer 1

Price discrimination occurs when firms sell the same good to different groups of consumers at different prices.

Examples

Airline industry is a perfect example of Price Discrimination. During peak holiday season high prices are being charged as demand is greater and more elastic. Flights which occur during the weekdays will be more expensive because these are typically taken by business travellers. If you stay for over the weekend, the price will be lower, as business travellers will not want to stay over the weekend, just to get a cheaper flight

Electricity Company charges different rates depending upon Quantity consumed. The first 100 units are charged at higher rate and subesrquent units are priced at lower rates. During first 100 units demand is inelastic and consumers are ready to pay high price. After that demand becomes less essential, so lower price is being charged.

Age discounts like discounts given to students or senior citizens on specific products are examples of Price Discrimination. Also gender based discounts are given. A hair saloon may offer more discounts to women on same service as compared to men.

Perfect Price Discrimination affecting Total Surplus.

Under perfect price discrimination, buyers enjoy no consumer surplus at all. Instead, total surplus consists entirely of producer surplus for the monopoly. A Monopolist can price it's product so that it is exactly equal to each buyer's willingness to pay. Under perfect price discrimination, the marginal revenue curve coincides with the market demand curve, so the monopolist will also produce until marginal cost equals the price of the product. This increases profit and Allocative Efficiency is also maximized when price equals marginal cost.