Principles of Economics

EGMC001
Monopoly: Unit 7

Learning Objectives:
 Understand the features of Monopoly
 Comprehend how a monopolist takes price and output decisions
 Understand the different degrees of price discrimination under
Monopoly
Features of Monopoly

Single seller and no close substitute

Price Discrimination

Restriction on entry and exit

Price Maker
Reasons for Monopoly

Government Regulation

Patent Rights

Control on raw materials

Economies of Scale
Economies of Scale & Monopoly
Monopoly arises when a business Economies of Scale
firm experiences economies of 20

scale as reflected by the 18 18

downward-sloping, long-run 16

average cost curve. Market

14

Cost Per Unit

12 12
demand is not large enough to 10

allow more than one business 8

9.25 9
LR Average Cost

firm to achieve sufficient 6

economies of scale. 4

Quantity per unit

Revenue for the Monopolist
• Monopoly - Supplies the
market demand
• Downward sloping inelastic
demand curve
• To sell more: must lower P on
all units sold
• For monopolist: p=AR
• Demand curve is also AR
curve
• Marginal revenue
MR=∆TR/∆Q
• For monopolist: MR<p
• Declines, can be negative
• MR curve is downward
sloping & lies below D/AR
curve
• TR curve
• Reaches maximum where
MR=0
Price and Output under Monopoly
: Short Run
• Marginal revenue is equal to
marginal cost at point E. We
extend this line vertically to the
line AR where the price is OP.
Therefore, at equilibrium level E
• Total Revenue =(OP) x (OQ) =
OPAQ
• Total Cost = (OC) x (OQ) =
OCEQ
• Profit =TR –TC = PCEA
Price and Output under Monopoly
: Short Run
• Marginal revenue is equal to
marginal cost at point E. We
extend this line vertically to the
line AR where the price is OP.
Therefore, at equilibrium level E
• Total Revenue =(OP) x (OQ) =
OPAQ
• Total Cost = (OC) x (OQ) =
OPAQ
Price and Output under Monopoly
: Short Run
• Marginal revenue is equal to
marginal cost at point E. We
extend this line vertically to
the line AR where the price is
OP. Therefore, at equilibrium
level E
• Total Revenue =(OP) x (OQ)
= OPBQ
• Total Cost = (OC) x (OQ) =
OP1AQ
• Loss = PP1AB
Price and Output under Monopoly
: Short Run
• The monopoly firm will earn profits over the long term and will not incur any
losses.

• When high barriers blocking new entrants insulate a monopoly from

competition, economic benefit will continue in the long run.

• A monopoly which earns short-term economic benefit may find that profit can
increase over the long term by changing size of the firm.
Meaning of Price Discrimination
• According to Robinson, "Price discrimination is paying different prices for the
same product or the same price for a differentiated product."

• Price discrimination refers to different prices charged by an entity based on some

criteria which may be explicitly mentioned, or otherwise implied.

• For example, Indian Railways have explicitly mentioned that tickets booked by
senior citizens will have some concessions on the price of ticket.

• Similarly, banking industry provides higher rate of interest to senior citizens,

another example of price discrimination. Similarly, entry ticket to Taj Mahal in
Agra shows price discrimination between Indian entrants and foreign citizens.
 Types of Price
Discrimination

On the basis
Personal Geographical
of use
Degrees of Price Discrimination
First Degree Price Discrimination

Second Degree Price Discrimination

Third Degree Price Discrimination

 Degrees of Price Discrimination
• First Degree Price Discrimination

Monopolist charges the maximum price from each buyer. This is also referred to
as perfect price discrimination, since it involves maximum consumer
exploitation. E.g. Lawyers and doctors.

• Second Degree Price Discrimination

• Buyers are divided into different groups, and these groups are charged
different prices depending on what they are willing to pay. Railways and
airlines engage in this type of price discrimination.
Third Degree of Price Discrimination
Conditions: 1. Market segmentation on basis of location, age, income, time,
purpose of use 2. Control over supply 3. Difference in price elasticity of demand

Market A Market B
Cost & Revenue

CMC
B
A
a b E’
E
Da D/AR
MRa MRb Db MRt
0 Qa Q0 Qb Q0 Q=Qa+Qb Q
PRICE DISCRIMINATION:THIRD DEGREE
Conditions: 1. Market segmentation on basis of location, age, income, time,
purpose of use 2. Control over supply 3. Difference in price elasticity of demand

Market A Market B
Cost & Revenue

CMC
B
A
a b E’
E
Da D/AR
MRa MRb Db MRt
0 Qa Q0 Qb Q0 Q=Qa+Qb Q
THANKS!