Qs. What is Monopoly? Explain how prices is determined under Monopoly?
A market is which a single producer exist. Who control whole market and making bearers for the entry of new firm and there is no close substitute of its commodity.
We said there is Monopoly in the market if we see following characteristics.
1. Single Producer
2. Homogenous product
3. Price Discremination
4. No entry of new producer or say bearer in the market
So in this regard we can say monopoly is price market and he can charge higher price. But if he fix the higher price may be his amount sold is lesser so in order to increase consumer he should have to decline the price. That is why monopoly firm change two prices by making price discrimination.
Price Output Determination Under Monopoly
In Monopoly the demand curve AR is downward sloped shows that as mono output sold MR decreases. Which is always less than AR curve.
A firm is in maximum level of profit or in equilibirium. When MR = MC
Similarly, Monopoly firm get equilibirium when there MR = MC and they set there price when MR = MC.
E ----> Equilibirium point where MR = MC
OP ----> Price set by Monopoly firm when MR = MC and the point at which they set at P' in AR
OQ ----> output produced at equilibirium
OPP'M ----> Total revenue
OTLM ----> Total cost
Profit = OPP'M - OTLM = TPP'L
Monopoly Price and Elasticity of Demand
A very important point about equilibirium of monopolist is that the equilibirium of monopolist will always lie at that level of output where the elasticity of demand for his product is greater than one.
As we see that MC = O the price set at which Ed is unity.
MC is increase the price set at the point where Ed > 1.
Qs. Explain how the equilibirium of firm is determined under monopoly?
As we knows that under perfect competition firm demand curve is perfectly elastic. But in Monopoly demand curve is downward sloped therefore MR is smaller than AR.
In Perfect Competitive market equilibirium exist when MR = MC = AR but under monopoly for equilibirium MC = MR < AR price.
Equilibirium is MR = MC < AR shows Monopoly charges higher prices and less output.
In short run under Monopoly there are three possible cases.
1. Super Normal Profit.
2. Zero Profit.
Qs. What is a Discriminating Monopoly? Under What conditions is price discrimination possible, profitable and socially describe?
Write Short note on price discriminating?
When Monopoly firms gives different prices for different types of market this is known as price discrimination. Like for example KESC charges two prices for same good one for commercial use and second for home KESC. Some time monopoly firm make their product differentiate for different market. These differences may be special, wrapper, packing etc.
Conditions of Price Discrimination
There are three main condition on which monopolist discriminates prices.
A. When consumer have certain preferences or prejudice mean get higher from upper classes. Price discrimination also occur if one consumer do not known that other consumer pay less than him.
When the nature of the good is such as make it possible for monopolist to change different prices like hair cut price are different in different areas.
When consumers are separated by distance or tariff barriers, the monopolist can charge different prices. Example (DO your self)
Condition Making Price Discrimination Possible and Profitable
The elasticities of demand in different market must be different monopolist divide these buyer into two categories in two different market.
These should be complete agreement among the sellers. Discrimination is possible when goods are sold on special orders because than the purchaser cannot know what is being charged from others
Qs. Explain how prices are determined in the case of discriminatory monopoly.
What is prices discrimination explain how a discriminating monopolist reaches equilibirium?
Price Determing Under Price Discriminating
In discriminating monopoly different prices are charged for the for the commodity while in simple monopoly single price charged for whole output.
So it should have to decide how much output will produced to discriminate the monopoly price. Monopoly firms divide his market in sub-market we know suppose they divide the market is two types is market A and B.
We see that market B has elastic demand curve than market A.
Where AR1 , AR2 ----> are Average Revenue of Market A and B.
MR1 and MR2 ----> are Marginal Revenue of Market A and B
Hence for the discriminating monopolist to be in equilibirium following condition must be satisfied. Marginal cost of total output combined revenue marginal MR1 in MR + A = MR2 in MKT B