ANDHRA PRADESH
Name : A.Satya Vani Kumari
Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Poly. For Women, SURYAPET.
Year/Semester : III Year / V Semester
Subject : Business Economics –I
Subject Code : CCP-502
Topic : Markets
Duration : 50 Mts.
Sub Topic : Price and output determination under
monopoly.
Misconception of monopoly price.
Distinction between competitive
equilibrium and monopoly equilibrium.
Forms of price discrimination.
Teaching Aids : power point, animation
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Objectives
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Review
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Conditions Necessary for Price
Discrimination
1.Existence of monopoly market situation
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3. Apparent product differentiation.
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6. Non-transferability characterstics of goods.
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When Price Discrimination is
Profitable
The price discrimination is profitable when :
a) Elasticity of demand in different markets differ.
(i) By charging more price in the market where elasticity
of demand is low and
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Proof for (A)
When elasticity of demand differ in two markets at a
given price, marginal revenue also will differ
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Hence, it is clear that Marginal Revenue (MR) in
Market-II with high elasticity of demand is high.
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But, as the demand curve in Market - II
is sloping downwards, the price will have
to be lowered to sell more.
2 -1
Then MR 1 = 11 = Rs. 5.50.
2
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So, due to price discrimination , Marginal Revenue (MR)
of inelastic demand market is also improved.
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Price discrimination is not profitable when the elasticity
of demand in different markets is same or in case of
Iso elastic markets.
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As Marginal Revenue (MR) of two markets is same, the
profit also will not change by transfering the output from
one market to another market.
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Pricing & output Equilibrium under
Discriminating Monopoly
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2. How much of output to sell in different markets for
maximizing profits.
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3. Price of product in different markets
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Assumptions for determining
equilibrium position
1. There are two separate markets namely market I & II.
2. The demand for the product in Market-I is relatively inelastic
and Market-II is relatively elastic.
3. The firm’s per unit revenue functions are known from the
demand curves.
4. Cost conditions are known.
5. Rationale of price discrimination is the maximization of total
profit (Represented in Fig.16)
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Graph Explanation
Fig. (a) represents the conditions of Market-I.
D1is demand curve which is relatively inelastic.
AR1 & MR1are Average Revenue & Marginal Revenue
curves.
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Fig (c) represents the aggregate condition of both
markets I & II.
∑MR = MR1 + MR2
MC is marginal cost curve.
MC curve intersects ∑MR at ‘E’ , so at this point ‘E’ ,
MC = ∑MR. ‘E’ is the profit maximizing equilibrium.
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‘OQ’ is equilibrium output
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AE crosses MR1 , at point ‘a’ and MR2 at point ‘b’.
At points ‘a’ & ‘b’ ‘OQ1’ & ‘OQ2’ are equilibrium outputs
and ‘P1 O1’ & P2Q2’ are equilibrium prices in
Markets I & II respectively
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‘OQ’ is the total output where MC = ∑ MR
P1Q1 > P2Q2 , while OQ1 < OQ2 means higher price is
charged in the market where demand is inelastic and
vice versa
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SUMMARY
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Quiz
Ans: False
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