PRICE AND OUTPUT

DISCRIMINATION
UNDER
MONOPOLY
 MONOPOLY
Market where single seller of commodity and large number of buyers
of the commodity.
Commodity has no substitute
Seller has no competitor .seller enjoys the full freedom like a king.
He charges his own determined price from buyer and buyer has to pay
the same price because he has no option ,no other seller is there, no other
product is there.
Example:- electricity supply from one agency, that is, state electricity
board.

Features
One seller and large number of buyers
No close substitute
Restrictions on entry of new firm
Price maker
Price discrimination
DETERMINATION OF PRICE AND
EQUILIBRIUM UNDER
MONOPOLY
Determine price of product to get maximum profit
Monopolist is in equilibrium when he produces that amount of output
which yields him maximum profits.
Price and equilibrium are determined by two different approaches.
1. TR & TC Analysis 2. MR & MC analysis

1.TOTAL REVENUE & TOTAL COST

APPROACH
According to this approach seller under a monopoly market can
earn maximum profit when difference between total revenue and total
cost is maximum. So equilibrium output is that output at which
difference between TR and TC is maximum.
 TC starts from P because TC is the
sum total of Total fixed cost and
Total variable cost . Fixed cost
will not be zero even if there is
no output.
TR starts from 0 i.e. no output no
revenue.
TP is the profit curve which is
negative at 0 output because at zero
output TR is 0 but total cost is not
zero so TP is (-ve) due to loss of
TFC.

If firm continue production more than OQ, difference between

TR and TC become narrow and TP going to fall.
so, to earn maximum profits monopolist should
produce OQ level of output
2. MARGINAL REVENUE & MARGINAL
COST ANALYSIS
in second approach
monopoly firm is in
equilibrium if following
conditions are satisfied
At equilibrium point ,E
MC=MR
MC cuts MR from below.

MC curve is U-shaped

MR & AR downward slope.
OQ is the equilibrium quantity
and OP is the equilibrium price.
Price and equilibrium determination under monopoly are studied with
reference to 2 time periods:
1.Short period
2.Long period

PRICE DETERMINATION UNDER SHORT

PERIOD
Time is so short that monopolist can-not change fixed factors.
Output increased only by increasing variable factors of
production only
A monopolist in equilibrium may face any of the three situations
in the short period

Super normal profits :- AR>AC Normal profits:- AR=AC Minimum loss:-AR<AC

1.SUPER NORMAL PROFIT
If the price(AR) charges at equilibrium output is more than average
cost then monopolist will earn super normal profit.

At equilibrium point
MC=MR
MC cuts MR from below
SNP bcz AR>AC

Monopolist will produce OQ units of

output and sell it at AQ price, which
is more than average cost BQ.
AQ – BQ = AB
In this situation the total super
normal profit of the monopolist will
be ABCP
2.NORMAL PROFIT
If average revenue and average cost are equal ,firm will earn normal
profits.(AC = AR)

At Equilibrium point ,E
a. MC = MR
b. MC cuts MR from below
c. MC cuts AC at its maximum point
At point R firm will earn normal profits.

3.MINIMUM LOSS :- If a monopolist firm in short run

fixes a price which is less than average cost then firm will suffer
loss.

(AR<AC)
AR = AVC
If price falls from P1 than firm should
Shut down its production.
PRICE DETERMINATION UNDER LONG
PERIOD
All factors of production are variable. Monopolist can increase and
decrease its supply by changing the factors of production. In long
run monopolist will earn only SNP ,bcz AR curve downward sloping,
it means monopolist changing the demand by changing the price.

SNP :- AR>LAC
SNP:- AR-LAC

Conditions of equilibrium, E
a) LMC = MR
b) LMC cuts MR from below

Monopolist earn SNP of

PHNK in long run period
MONOPOLY EQUILIBRIUM AND LAW OF
COST
Monopolist will fix more or less price of his product in the long run.
Depend upon following things:-

1. NATURE OF ELASITICITY OF DEAMAND

a)Inelastic demand :- fix high price
b)Elastic demand :- fix low price

2. EFFECT OF LAWS OF COST ON MONOPOLY PRICE

DETERMINATION

a)Diminishing cost

b) Increasing cost

c) constant cost
MEASURE/DEGREE OF MONOPOLY
POWER
Power to influence the quantity of output and price on the
part of monopolist is called monopoly power. To measure
monopoly power, two main methods are as follows:-
1.Learner’s measure(price-cost margin):
Monopoly Power = P-MC
P
• Larger the difference between P and MC ,greater is the
monopoly power.
• Difference between P and MC is ZERO , the monopoly power
is zero.

2. Bains measure :
Monopoly Power = AR-AC
• Larger the difference, higher the super normal profit, greater
is the monopoly power.
• Monopoly power in reality depends upon the volume of
super-normal-profit
COMPARISON BETWEEN MONOPOLY AND
PERFECT COMPITITION
PERFECT COMPITION MONOPOLY
There are large no. of buyers and There is only one seller and
large no.
Sellers. of buyers.
Entry and exit of firms are free Strong barriers on entry of
new firm
Price is fixed by industry. Firm is Monopoly himself determines
the
price taker and industry is price price ,so he is the price maker
maker
Price is constant, so MR = AR Price is not constant, so MR
AR
Firm can take decision only MR & AR downward
Monopolist sloping
can take decision
ofcurves
regarding production, it can-not production or price.
take decision of price.
In long run , price under perfect In long run , price under
monopoly
Competition is less than price of is higher than price of perfect

Monopoly. Price= LAC competition. Price > LAC

so , normal profits in long run so, SNP in long run
PRICE DISCRIMINATION
/DISCRIMINATING MONOPOLY
A monopolist often charges different prices of the same
product from different consumers or different industries. The
price policy of monopolist is called price discrimination.

KINDS OF DISCRIMINATING MONOPOLY

1. Personal price discrimination
2. Geographical price discrimination
3. Price discrimination according to use

CONDITIONS
 Existence of monopoly
 Separate market
 Difference in the elasticity of demand
 Ignorance of the consumer
 Government regulation
 Product differentiate
DEGREES OF PRICE DISCRIMINATION
1) Discrimination of first degree :- It refers to that
discrimination wherein monopolist charge different prices for each
commodity. Price is charged according to paying capacity of buyer.
No consumer surplus enjoyed by the consumer.

2) Discrimination of second degree :- It refers to that

discrimination under which monopolist sells a product at different
prices in such a way that those who are prepared to pay more than
price X are charged price X. On the contrary those who are
prepared to pay less than price X and more than price Y for the
product.

3) Discrimination of third degree :- It refers to that

discrimination under which a monopolist divides the entire market
of a product into two or three groups and charges different prices
from each group. Products are sold at different rates in local
markets and foreign market. In real life this is the third degree of
discrimination which can be seen.