Page 263 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Given equations clarify that due to different price elasticity in market A and B, marginal revenues is
also different. In market A elasticity of demand is low i.e. marginal revenue is less i.e. 5. In opposite,
the elasticity of demand in market B is more i.e. 5, hence marginal revenue (MR) is higher i.e. 8. That
is why monopolist will take a unit of goods from market A, where marginal revenue is 5, and sell this
unit to market B where marginal revenue is higher i.e. 8 on selling on unit more in market B. In this
way monopolist will earn an amount of 3 more. He will keep doing the picking of units of goods from
market A and selling them in market B, until the marginal output of goods in both markets be equal i.e.
MR = MR .
A B

Price discrimination is that situation where a commodity is sold at different prices
to different buyers.

13.11 Price and Output Determination Under Discriminating Monopoly

The aim of the monopolist in restoring to price discrimination is to increase total revenue and profit.
Analysis of price determination under price discrimination can be made with reference to two or more
than two market conditions there we study a situation of price discrimination in which a monopolist
by selling a product at two different prices pockets a part of consumer surplus. Pigou has called this
as “Price Discrimination of Third Degree”. Every discriminating monopolist in order to maximize his
profits will produce upto that level at which marginal revenue (MR) is equal to marginal cost (MC).
The monopolist will apply this condition of marginal revenue and marginal cost to get maximum profit
in every market. He will do the production as long as marginal revenue is more than marginal cost
(MR > MC). We assume that the monopolist will sell his product in two different markets A and B in
which the demand of elasticity is different. Discrimination monopolist has to decide (i) what is the total
output to produce; (ii) how much of output is to be sold in different markets and in what price so as to
get maximum profit. In order to get maximum profit the monopolist will have to take two decisions.

1. How Much to Produce?
As we assume that production of the monopolist is homogenous, so he considers marginal cost of the
whole production irrespective of the type of market in which he sells. He will produce upto that point
in which marginal cost is equal to Combined Marginal Revenue (CMR) of the two markets. So to get
estimated marginal revenue curve, the marginal revenue curves of market A and market B i.e. MR and
A
MR are added. The monopolist will produce that much amount of the goods where marginal cost and
B
combined marginal revenue will be equal which means,
MC = MR + MR = MR
A B A+B

2. How Much to Sell in Different Markets and at What Price?

The monopolist, in order to maximize his The monopolist will sell more quantity of the product (at
profits, will equalize marginal cost (MC) and less price) at the time when its demand elasticity will be
marginal revenue of market A is MR and more and sell less quantity of the product (at more price)
A
market B is MR for the entire production. when its demand elasticity will be less. This is because the
B
Figure 13.6 depicts in market A, market more the elasticity of a product is, the more is the possibility
demand is less elastic and in market B, market of the buyers being reduced. That is why monopolist by
demand is more elastic. This means that the determining less price wants to sell more quantity of goods.

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