Monopoly is a market structure where there is only one seller of a product or service. Examples include public utilities like electricity and water. Under monopoly, the firm faces a downward sloping demand curve and sets a price where marginal revenue equals marginal cost to maximize profits. This price is generally higher and quantity lower than under perfect competition. Price discrimination is when a monopolist charges different prices to different customers, even though the cost of production is the same. It allows a firm to extract more consumer surplus. Conditions for effective price discrimination include the ability to segment markets and prevent resale.

2. What is Monopoly?
 It is a market system in which one firm
makes up the whole market.
Pure monopoly = single firm produces a
commodity or service for which there is no
close substitute (no other firms producing
the same product/s varying only in minor
ways from that of the monopolist)

3. Examples

6. DEMAND CURVE
Price Quantity TR MR TC MC AC PROFIT
Cost
80 - - - 60 - - (60)
70 1 70 70 80 20 80 (10)
60 2 120 50 90 10 45 30
55 2.5 137.5 35 100 20 40 37.5
0
50 3 150 25 120 40 40 30
40 4 160 10 200 80 50 (40)
30 5 150 (10) 350 150 70 (200)

7.  Marginal revenue is less than market
price
 For products with large fixed cost,
marginal cost is lower than the average
cost and vice versa
 industry demand curve is negatively
slope

9. Short Run Equilibrium
1. At what point would I be losing?
2. At what point would I break - even?
3. At what point would I maximize profit?

10. Rules for Monopoly
MR > MC = monopolist earns profit by
increasing output
MR < MC = monopolist earns by
decreasing output
MC = MR = monopolist is maximizing
profit

11. Short run Profit Minimization : Total Curves
400
300
200
100
0
-100
-200
Total Profit
Total Cost
Total Revenue

12. Short run Profit Minimization Per Unit Curves
160
140
MR
120
Demand of Price
100 AC
MC
80
60
40
20
0
-20

13. Short run Loss minimization:
Per unit curves

15. Less Than the Most Efficient
Size of the Plant
 the monopolist market is limited that the
marginal revenue curve cuts the long run
average cost curve (LAC)

17. B. Most Efficient Size of the
Plant
monopolist market and cost curves are
such that the marginal revenue curve hits
the minimum point of the long run
average curve (LAC)

21. What is price discrimination?
 The practice of charging different prices
for essentially the same good or service
Why discriminate price?
1. Monopolist can keep the markets apart
2. For it to be effective and profitable

22. Conditions Necessary for
Price Discrimination
 The firm must have some degree of monopoly
power — it must be a price setter.
 the market must be capable of being fairly
easily segmented—separated so that
customers with different elasticities of demand
can be identified and treated differently.
 The various market segments must be isolated
in some way from one another to prevent
customers who are offered a lower price from
selling to customers who are charged a higher
price.

23. Examples of Price
Discrimination
 Senior citizens and students are often offered
discount fares on city buses and trains.
 Children receive discount prices for movie
theater tickets and entrance fees at zoos and
theme parks.
 Faculty and staff at colleges and universities
might receive discounts at the campus
bookstore/cafeteria.
 Physicians might charge wealthy patients more
than poor ones.

24. Types of Price Discrimination
 First
Degree
 price varies
by
customer's
willingness
or ability to
pay

25.  Second Degree
 price varies
according to
quantity sold

26.  Third Degree
 price varies by attributes such as location or by
customer segment, or in the most extreme
case, by the individual customer's identity; where
the attribute in question is used as a proxy for
ability/willingness to pay.

28. How Price Discrimination
Affects Output?
How many manuscript should Carla edit?
Student Reservation Price
A $40
B 38
C 36
D 34
E 32
F 30
G 28
H 26

29. Students Reservation Total Revenue Marginal
Price Revenue
A $40 40 40
B 38 76 36
C 36 108 32
D 34 136 28
E 32 160 24
F 30 180 20
G 28 196 16
H 26 208 12

30. If Carla can price – discriminate, how
many papers should she edit?
Student Reservation Price
A $40
B 38
C 36
D 34
E 32
F 30
G 28
H 26

31.  Perfectly discriminating monopolist
 a firm that charges each buyer exactly his
or her reservation price
 Hurdle Method of Discriminating
 the practice by which seller offers a
discount to all buyers who overcome some
obstacle
 Perfect Hurdle
 a threshold that completely segregates
buyers

32. Price Discrimination with Perfect Hurdle
Students Reservation Total Revenue Marginal
Price Revenue
List Price Submarket
A $40 40 40
B 38 76 36
C 36 108 32
Discount Price Submarket
D 34 34 34
E 32 64 30
F 30 90 26
G 28 112 22
H 26 130 18

33. Evaluation
Total Total Profit Economic
Revenue Opportunity Profit
Cost
Without Price 4 (34) = 136 3 (29) = 87 108 108 – 87 =
Discrimination 21
With Price 40+38++36 6 (29) = 174 210 210 – 174 =
Discrimination +34+32+30 136
=210
With Perfect 3(36) +2(32) 5(29) = 145 172 172-145=27
Hurdle = 172

35. ADVANTAGES TO THE FIRM
 Enables producers to gain a higher level
of revenue
 Enables producers to produce more and
gain from economies of scale.
 Profits gained in inelastic market segment
can be used to drive away competition in
more elastic market segment

36. ADVANTAGES TO THE
CONSUMERS
 Poorer consumers may be able to consume
products.
 Allows people to purchase a product at a lower
price than they would have had to pay if the
producer had not been able to secure higher
prices from others.
 Increased output provides opportunity for more
consumers to use the product.
 Economies of scale: If total output increases
significantly, this may result in lower average
cost and thus lower prices for consumers.

37. DISADVANTAGES OF PRICE
DISCRIMINATION
 Any consumer surplus that existed before
the price discrimination will be lost.
 Some consumers will pay more than the
price that would have been charged in a
single, non discriminated market.
 If a firm succeeds in driving rival firms out
from the market, it can use its increased
monopoly power to increase prices and
exploit the consumers.

39. Regulation of Monopoly by Price control
MC
P1
AC
P2
C2
C1
MR
D
Q1 Q2

40. Monopolistic Output Restriction
SMC
P1 SAC
P2
MR
D
Q1 Q2