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Micro - Essay Example

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Monopoly – price discrimination Monopoly is a market structure where one firm serves the entire market. A monopolist can maximizes their profit with their knowledge of the market demand and the power of single operation in the market. A monopolist can set the price at a level they desire and the price decision is determined by their output decision…
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Download file to see previous pages... The logic is that the cost required to produce another unit of the output should be equal to the revenue generated from that additional unit. It is illustrated as follows. AR MC MR AC P P’ Q Q’ In the above diagram, the monopolist decides output at the point where MR=MC. The corresponding price from the demand curve is then set which is P > P’. P’ is the perfect competition price and Q is the corresponding output. (Chakraborty, 351-354) Monopoly and Deadweight Loss The monopolist makes a higher profit due to the single market and manages to appropriate a part of the consumer’s surplus. D P M P’ E C O Q MR AR In the above diagram the consumer surplus was DP’C under perfect competition. The monopolist appropriates PMEP’ amount of consumer surplus. Its producers’ surplus is P’EQO. Therefore loss of social welfare or the deadweight loss is EMC. This is lost from the society due to inefficiencies of monopoly. (Chakraborty, 351-354) Perfect Discrimination Perfect price discrimination is a special case of monopoly where the producer can extract the maximum price from each buyer. The producer in this case deals with each consumer individually. He has perfect information about the buyers. Therefore he is able to charge a price high enough from each buyer. The prices in this case differ from buyer to buyer. ...Download file to see next pagesRead More
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