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AR (D)
MR
Quantity
0
The slope of MR Curve is double the slope
of demand curve
Price Output Determination under Monopoly
Y
MC
AC
Price output analysis in the
P P’ case of monopoly is also an
Revenue
Profit analysis of the equilibrium
& Cost
of the firm and industry
T L under monopoly
E
AR
MR
Output
0 M
Few Properties of Equilibrium under Monopoly
1. Like a perfectly competitive firms operating in the short
run, the monopolists either earn excess profit or incurs
losses or only normal profit.
2. The monopolist can also produced at the minimum points
if the AC curve, though he will not earn normal profit at
that point. He will earn more than normal profit
3. Like perfect competition, monopolists can earn even
negative profits. In the long run monopolists will either
earn normal profits or more than normal profits. But a
perfectly competitive firm in the long run earns only
normal profits and neither more nor less
4. Under prefect competition, price = MR = MC, while under
monopoly MR=MC. Under monopoly, price>MR. hence
under monopoly, price >MC
5. If the MC curve is a horizontal straight line, equilibrium of
the firm under perfect competition remains indeterminate.
However this is not the case under monopoly. Even if the
MC curve is horizontal, the equilibrium level of output is
determined
6. Monopolist does not operate on that portion of the demand
curve which is inelastic i.e. where the elasticity of demand
is less than unity
Price Discrimination
When a monopolists charges different prices form
different buyers for the same good, he is known as a
discriminating monopolist
Price discrimination is not possible under perfect
competition because every one knows the price at
which the good is being bought and sold
Two conditions must be fulfilled for price
discrimination to be possible (1) Markets must be
divided into submarkets with different price elasticities
(2) there must be effective separation of the
submarkets so that no reselling can take place from a
low priced market to a high price market
Types of Price Discrimination (a) Personal (b) local (c)
according to trade or use
When Price Discrimination is
Possible
When consumers have certain preference or
prejudices
Nature of good – direct services
When consumers are separated by distances or
tariff barriers
Government regulations – Railways, Electricity
Ignorance of the consumers
Same service for different purposes
Special orders
Possible only in imperfect competition
Types of Price Discrimination
First-degree discrimination involves
charging of maximum prices possible for
each unit of output
Second degree price discrimination,
instead of setting different prices for each
units, involve the pricing based on the
quantities of output purchased by
individual consumers
Third degree price discrimination involves
the separating the consumers or markets
in terms of their price elasticity of demand
When Price Discrimination if
Profitable
Price discrimination is profitable only
if elasticity of demand in one market
is different from elasticity of demand
in the other
Marginal Cost of Total Output =
Combined Marginal Revenue
Marginal Revenue in Market A =
Marginal Revenue in Market B =
Marginal Cost
In order to maximize profit the
monopolist will distribute his output
in the two market in such a way that
the MR is the same in both the
markets as is equal to the MC. So
long as MR1>MR2 it will be profitable
for the monopolist to shift one unit
from second market to the first
market as it increase his total
revenue
Equilibrium of a Discriminating Monopolist
MC
P2
E
P1
AR AR
MR MR
MR
Q
Q1 Q2
0 Q1 Q2 0
0 Q = Q1+Q2
Effect of a Shift in the Demand on Monopoly
In a perfectly competitive market, the
demand curve is downward sloping and the
supply curve is upward rising, and upward
shift of demand curve will increase the
equilibrium price and the equilibrium level of
output
However in the case of monopoly, an upward
shift of the demand curve. MC curve
remaining the same, will increase the
equilibrium output but the effect on
equilibrium price is indeterminate. It may
increase, decrease or remain constant
depending on the extent of shift in the
demand curve and the change in the
elasticity
Effect of Shift in Cost
In the case of increase in the fixed cost, there will
be no impact on the equilibrium prices and
output, since the fixed cost when differentiated,
in other words, when fixed cost increases, it will
have no impact on the MC curve. Hence the
equilibrium will remain the same.