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10
Monopoly
Definition
A monopoly is a market structure in which
there is a single seller and large number of
buyers that sell products that have no close
subsitutes. The entry and exit barriers are
also high.
Characteristics
One seller and large number of buyers.
A monopolist is a price maker since there is
only one seller and it has the power to control
the prices in the market.
TC
Using Graph:
TR TR curve is increasing and
after the profit maximizing
output, the curve starts to
decline.
Maximum profit is where
Highest vertical the vertical difference
difference between TR and TC is the
highest.
Quantity
MC
Using Graph:
MR curve under imperfect
market is downward sloping as
P*
output increases.
The profit maximization level
occurs at MR = MC, where
AR=P
the MC curve intersect with the
MR curve.
MR
Quantity
Q*
Price (RM) MC
ATC The profit maximization level occurs
where MR curve and MC curve
intersect at point A.
LRMR
Quantity
Q*
Microeconomics All Rights Reserved
© Oxford University Press Malaysia, 2008
10– 18
PRICE DISCRIMINATION AND
ITS CONDITIONS
Definition
Price discrimination refers to the selling or
charging of different prices by a firm to different
buyers for the same product.
Necessary Conditions
Existence of monopoly power: Price
discrimination can occur only if monopoly power
exists and there are no competitors in the
market.
Microeconomics All Rights Reserved
© Oxford University Press Malaysia, 2008
10– 19
PRICE DISCRIMINATION AND
ITS CONDITIONS (CON’T)
Existence of different markets for the same
commodity: A firm should be able to separate
customers according to price elasticity of demand.
Prevent resale: Products purchased in the low-
priced market should not be resold in the high-
priced market.
Legal sanction: Government allows public utility
firms such as electricity to charge different prices
from different consumers.
Microeconomics All Rights Reserved
© Oxford University Press Malaysia, 2008
10– 20
TYPES OF PRICE DISCRIMINATION
First-Degree Price Discrimination
• Occurs when a firm charges each consumer the
maximum price that the consumer is willing to pay
for each unit.
• This type of price discrimination is also known as
perfect price discrimination.
• The best example of first-degree price
discrimination is an auction.
Microeconomics All Rights Reserved
© Oxford University Press Malaysia, 2008
10– 21
TYPES OF PRICE
DISCRIMINATION (CON’T)
Second-Degree Price Discrimination
• Occurs when products are grouped into blocks
and each block is charged at a different price.
• This type of price discrimination is charged by
public utilities such as electricity charges, water
charges, and telephone charges .