MONOPOLY

CHARACTERISTICS
1.Single seller-one firm in the industry
2. Produce unique product which has no
close substitute
3. Firm can determine price-Price maker
-Demand curve is downward sloping
curve
4. Block entry-many barriers to entry (e.g
large financial capital, regulations,and
level of technology)

SHORT RUN EQUILIBRIUM

-Price and output that maximize the profit
RULE:
MR= MC
e.g P= 400 20Q
TC= 500 + 20Q 2
MR =MC
400 40Q = 40 Q
80Q = 400
Q= 5
P= 400 20 (5)
= 400-100
= 300

MC

AC

P*
AC

D
Qty

Q*
MR

LONG RUN EQUILIBRIUM

The short run profit can persist in the long
run due to barriers to entry
Therefore, in long run,monopoly can earn
profit.

PRICE DISCRIMINATION
Different prices charged on different
customers which do not reflect the
differences in costs
e.g movie tickets, airline tickets, telephone
rates
Three conditions for price discrimination to
be successful:
1. Firm must have some control over price
2. Different group of customers have
different price elasticity of demand
3. A firm can prevent the customer from
reselling the product in another market

TYPES OF PRICE DISCRIMINATION

1.FIRST DEGREE PRICE
DISCRIMINATION
-charging maximum price possible for each
unit of output
-along the demand curve

MC=AC
D
Quantity

SECOND DEGREE PRICE

DISCRIMINATION
-pricing based on quantities of output purchased
by individual consumers
-blocks of consumption
e.g electricity, water

2.

D
Qty

3.

THIRD DEGREE PRICE

DISCRIMINATION
-Separate the markets based on different price
elasticity of demand
More elastic demand-lower price
Inelastic demand-Higher price
e.g Telephone ( residential vs business)
Movie ticket ( adult vs children)
Fees ( Domestic students vs Foreign
students)
Diagram and calculation