Price Discrimination, Consumer and Producer Surplus

• Consumer surplus is the difference between what consumers are willing to pay and the price they actually pay.
• Producer surplus is the difference between what producers are willing to accept and the price they actually sell for.
• A monopolist takes consumer surplus and turns it into producer surplus, benefiting at the expense of consumers.
• Monopoly results in an overall loss of economic welfare, known as the deadweight welfare loss.
• Price discrimination is when a firm charges different prices to different customers based on their willingness to pay.
• To engage in price discrimination, a firm needs market power, identifiable customer groups, and no possibility of arbitrage.
• First-degree price discrimination is charging each consumer the maximum price they are willing to pay.
• Second-degree price discrimination involves splitting the market by quantity sold, while third-degree price discrimination separates the market by consumer group.

This module explains the concepts of consumer and producer surplus and how they relate to monopoly power and price discrimination. Consumer surplus is the difference between what consumers are willing to pay and the price they actually pay, while producer surplus is the difference between what producers are willing to accept and the price they sell for. In a competitive market, there is a balance between consumer and producer surplus. However, a monopolist can restrict output and charge a higher price, resulting in a transfer of consumer surplus to producer surplus. This leads to a loss of overall economic welfare, known as the deadweight welfare loss of monopoly. Price discrimination occurs when a firm charges different prices to different customers based on their willingness to pay. There are different types of price discrimination, including first, second, and third-degree. First-degree price discrimination, where each consumer is charged their maximum willingness to pay, is unlikely in reality. Second-degree price discrimination involves splitting the market by quantity sold, while third-degree price discrimination separates the market by consumer group. Overall, price discrimination allows firms to capture more consumer surplus and increase their profits.