hi everybody job breed here from reviewe eon.com today we're going to be talking about price discrimination it's great for monopolies terrible for consumers if after watching this video you still need a little more help head over to reviewe eon.com and pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics AP exams let's get into the content now first of all we need to know what price discrimination is price discrimination is when a firm sells different units of output at different prices that means it's the same product but it's being sold at one price for some consumers and other prices to other consumers in order to be able to price discriminate the first thing a business must be able to do is divide its customers by willingness to pay customers who have a higher willingness to pay will get charged higher prices and customers with a lower willingness to pay pay lower prices and a consumer's willingness to pay is equal to the elasticity of their own personal demand curve customers with elastic demand are more sensitive to changes in price and as a result firms that price discriminate will charge these customers lower prices customers that have an inelastic demand are less sensitive to a price change and they will be charged higher prices as a result another thing that is helpful for businesses that price discriminate is to have the ability to prevent resale of the item that they're price discriminating on one of the businesses that is notorious for Price discriminating is the airline industry if you buy a ticket to Hawaii well in advance you will pay one price but if you wait till the last minute you will pay a much higher price and that's because Airlines know that their customers get less sensitive to price changes as the date of the flight approaches so as the consumers get more price in elastic they pay higher prices and these different prices that are charged by the business do not reflect different costs of production they simply reflect their different customers willingness to pay for their product now there are three different types of price discrimination we're going to start start with the third one first and that is third degree price discrimination and here businesses are charging different groups of people different prices you might see kids eat free advertisements for restaurants because businesses know that families have more price sensitivity and so they make it cheaper for families to eat at their restaurants you've also I'm sure seen senior citizen discounts which is the same thing as charging young people more but of course you students also get discounts as well as the military and that is price discrimination by group the next form of price discrimination is called second degree price discrimination that is where you charge different prices for different quantities of a product it's essentially bulk discounts for example if you buy one of those small containers of hand sanitizer you might pay 78 cents per ounce but if you buy a larger package of that hand sanitizer you would pay only 31 cents an ounce and if you get the biggest size option you're going to pay just 20.3 cents per ounce so even though these containers have the exact same hand sanitizer the price per ounce varies by the size this is one form of price discrimination the people who are willing and able to buy in bulk pay a much lower price than the people who buy smaller portions here so let's take a look at the Monopoly graph that's where you're going to see price discrimination in AP microeconomics it's the Monopoly graph where we put it and let's see how charging different groups of people different prices looks on that graph now we know that the Mr equal MC quantity is the profit maximizing quantity 65 here and we have a profit maximizing price of $29 this is a single price Monopoly that means they are charging the same price for All units of output and that's the typical Monopoly you're going to see in microeconomics and here is our profit box for this Monopoly but if this firm price discriminates it can charge some of these consumers the ones on the higher portion of that demand curve higher prices because that demand curve shows their willingness to pay and those consumers were willing to pay much more than $29 so here we see those first 15 units we had $41 as the potential price that consumers were willing to pay if they charge $41 for those first 15 units assuming they can figure out who's willing to pay that price we would have this additional area of economic profit and the next 20 units all the way up to unit 35 we have $35 being the maximum price for those next 20 units and if this Monopoly was able to identify those consumers and charge them the $35 for those next 20 units that would would increase their profit by that box right there and so by dividing their consumers into three distinct groups and charging them the higher price that they're willing to pay they can increase their economic profit from $390 where it was when they were just a single price Monopoly all the way up to $690 which is what we've got here shaded in green now next we're going to talk about perfect price discrimination this is what's called first deegree price discrimination and it's probably just a theoretic IAL model here but you might be able to imagine a scenario where a firm is able to figure out exactly how much every one of their consumers is willing to pay and charge them that maximum price unfortunately for many of you who are watching this video some of the best price discriminators in this economy are colleges the official sticker price or tuition price for colleges keeps going up but the price that people actually pay is not increasing as much and the reason is price discrimination through financial aid packages colleges are able to price discriminate and charge people pretty close to the highest amount that they are willing to pay and while colleges might not be true Perfect Price discriminators we're going to go ahead and assume they are for the purposes of this example moving forward here we have a table with the numbers of different quantities of students that could go to college and the prices that they would pay for tuition and for the purposes of our numbers and our graph we're going to assume this is a monopoly of course that's not really true when it comes to colleges but this is the model you need to know for an introductory microeconomics course so here we have a table that has all of the different quantities that would go to college at each of the different prices of college tuition and these numbers are for a single price Monopoly no price discrimination and as you know based on your Monopoly graph and you can see it in the table here the marginal revenue is going to fall faster than the price and that's because as they lower the price of the next unit of output they are going to have to lower the price on all previous units that makes marginal revenue fall faster than the price but if this firm perfect price discriminates and charges the first student $10,000 the second student $9,000 and the third student $8,000 and so on we would see the total revenue change and with that the marginal revenue is going to increase to being equal to the price being charged and if we graph out those two columns of course the quantity and price that is the demand curve here and when we graph the quantity with the marginal revenue that gives us the marginal revenue curve and so over on the graph that means when a firm Perfect Price discriminates that marginal revenue curve is going to merge upward and become equal to the demand curve now the perfect price discriminating Monopoly is going to produce where Mr equals MC qf is that quantity and PF is the profit maximizing price but this is the profit maximizing price for just the last unit produced and that's because the firm has actually charged every price along the demand curve for every quantity being produced because that demand curve shows consumers maximum price they are willing to pay and since the price of the last unit produced is equal to the marginal cost this firm is now allocatively efficient and as a result of being allocatively efficient there is no dead weight loss for this firm when they perfectly price discriminate now it might appear that this box here is the amount of economic profit but we must remember that all of those consumers up to qf were actually charged the maximum price they were willing to pay and that means we have this additional triangle of economic profit this firm has essentially turned all of the consumer surplus into economic profit for the firm so when a monopoly is able to figure out exactly how much their consumers are willing to pay for each unit if they're able to perfectly price discriminate the marginal revenue curve merges with the demand curve The Firm becomes allocatively efficient and economic profit for the firm dramatically increases and there you have it that is everything you need to know about price discriminating monopolies if you still need a little more help head over to review eon.com where there's lotss of games and activities to help you practice the skills you need to know on your microeconomics exam that's it for now I'll see you all next time