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Lecture 10

ECON101 Lecture Notes - Lecture 10: Monopoly Price, Marginal Revenue, Price Discrimination

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Corey Van De Waal

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Monopoly Price-Setting Strategies
- For a monopoly firm to determine the quantity it sells, it must
choose the appropriate price
o Single-price monopoly firm that must sell each unit of its
output for the same price to all its customers
o Price discrimination the practice of selling different units
of a good/service for diff prices
Ex) Microsoft sells its Windows and Office softwares at
diff prices to diff buyers
Ex) pizza producers offer a second pizza for a lower
price than the first one
Many firms price discriminate, but not all of them are
monopoly firms
When a firm price discriminates, it is charging the
highest possible price for each unit sold and making
the largest possible profit
Price and Marginal Revenue
- Monopoly price setter demand for the monopolys output is
the market demand
- To sell a larger output, a monopoly must set a lower price
- Total revenue (TR) = the price (P) x quantity sold (Q)
- Marginal revenue (MR) = the change in total revenue that results
from a one-unit increase in the quantity sold
- For a single-price monopoly, MR < P
- For a monopoly, MR < P at each quantity
Marginal Revenue and Elasticity
- A single-price monopoly’s MR is related to the elasticity of
demand for the good
o If demand is elastic, a fall in the price brings an INCREASE in
As the price falls, TR increases
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