Index
The Demand Curve 1
The Demand Curve 2
The Demand Curve 3
The Laws of Supply and Demand - 4
The Laws of Supply and Demand - 5
A ''Contraction'' of Demand - 6
''Ceteris Paribus'' - 7
An ''Expansion'' of Demand - 8
Marginal Utility - 9
Marginal Utility - 10
Marginal Utility - 11
Marginal Utility - 12
Consumer Surplus - 13
Consumer Surplus - 14
Price Discrimination - 15
An ''Expansion'' of Supply - 16
An ''Expansion'' of Supply - 17
Market Equilibrium - 18
Market Equilibrium - 19
Market Equilibrium - 20
Movements of the Demand Curve - 21
Movements of the Demand Curve - 22
Movements of the Demand Curve - 23
Inferior Goods - 24
Movements of the Demand Curve - 25
Movements of the Supply Curve - 26
Movements of the Supply Curve - 27
Movements of the Supply Curve - 28
The Income Effect - 29
The Substitution Effect - 30
The Substitution Effect - 31
The Substitution Effect - 32
The Substitution Effect - 33
Complements - 34
Complements - 35
Review: Factors Effecting Demand - 36
Review: Factors Effecting Demand - 37
The Goals of Firms - 38
The Goals of Firms - 39
To: Elasticity

Price Discrimination - 15

Have a look at your latest electricity bill. Why do electricity suppliers charge one price for the first block of electricity you use, and a lower price for the next block? Surely one kilowatt of energy is the same as the next?

Indeed, each kilowatt of energy is the same as the next - but the value in use of electricity is different. Most people prefer electric lighting in their homes. (Candles are nice for romantic dinners, but they are impractical for every day use.) The amount of electricity we use for lighting is relatively small, though. We can use electricity for heating our hot water heater (and this requires a lot of electricity), but gas is equally as convenient. Thus, to get us to use electricity for all our energy needs, the power company will have to set a low price for electricity; low enough for electricity to be competitive with the cost of gas. However, this means electricity users would gain a huge consumer surplus for their lighting needs! Electricity suppliers are discriminating monopolists. They can gain extra revenue, (and thus reduce the consumer surplus) by setting up a two price system. The value in use of electricity for lighting is higher than the value in use of electricity for heating. Since relatively little electricity is used for lighting, the first component of our electricity bill reflects this usage; the second component of the bill reflects the heating cost. Some of the consumer surplus is transferred to the power company as extra revenue!