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Lecture

ECON 208 Lecture Notes - Marginal Revenue, Demand Curve, Price Discrimination


Department
Economics (Arts)
Course Code
ECON 208
Professor
Sebastien Forte

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Chapter 10: Monopolys, Cartels, and Price Discrimination
For monopolists, marginal revenue is less than price
If the monopolist produces too much, he would need to charge a lower price for
Qd to match Qs
A monopolist faces a downward sloping market demand curve (different from in
a perfectly competitive market where they faced a horizontal demand curve)
If the monopolist charges the same price for all units sold, its total revenue (TR)
is:
TR = p x Q
^Regularily is is (TR = p x q). This is a capital Q because he has to think about the
whole market quantity, not just his own (market quantity is his own)
Marginal Revenue (MR) is the revenue resulting from the sale of an additional
unit of production:
MR = ΔTR/ΔQ
The monopolist must reduce the price to increase its sales- therefore the MR
curve is below the demand curve
MR curve- same intercept and twice the slope of the demand curve
Profit maximizing point is lower than minimum average cost point (?)
Price not equal to marginal revenue with monopolists- and they sell at higher
prices and lower quantity than in a perfect market. This creates a deadweight
loss
Price discrimination: imagine two customers willing to pay two different prices
(some willing to pay more than others). Price discrimination is when producers
practice charging different prices for the same product that have the same cost.
If you have an option much better than the other, someone who can pay more
won’t get less (ex. If you have enough money to pay for first class every plane
ride, you won’t pay for coach)
To get maximum revenue, you need to reduce the quality for those paying less,
because if you don’t, the people who are paying more will go to the less
expensive option if the quality is the same
Central to this is that different consumers value the product by different
amounts
Any firm facing a downward sloping demand curve can increase profits if it is able to
price discriminate
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