Figure 121

Consumers' Surplus

Consumers' surplus is shown by the area P*AB and represents the value of output to consumers above and beyond the amount they pay to producers.

Price per

Consumers' Surplus

Consumers' surplus is shown by the area P*AB and represents the value of output to consumers above and beyond the amount they pay to producers.

Price per

some of the value represented by consumers' surplus. Such price discrimination will always increase profits because it allows the firm to increase total revenue without affecting costs. A firm that is precise in its price discrimination always charges the maximum each market segment is willing to pay. Price discrimination is charging what the market will bear.

Finally, it is important to recognize that price discrimination does not carry any evil connotation in a moral sense. In some circumstances, price discrimination leads to lower prices for some customer groups and to a wider availability of goods and services. For example, a municipal bus company might charge lower prices for the elderly and the handicapped. In such circumstances, the bus company is price discriminating in favor of elderly and handicapped riders and against other customers. This type of price discrimination provides elderly and handicapped customers a greater opportunity to ride the bus. Because of incremental revenues provided by elderly and handicapped riders, the bus company may also be able to offer routes that could not be supported by revenues from full-fare customers alone, or it may be able to operate with a lower taxpayer subsidy.

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