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Deadweight loss monopoly price discrimination

Lay people typically say monopolies charge too high a price, but economists argue that monopolies supply too little output to be allocatively efficient. In an earlier module on the applications of supply and demand, we introduced the concepts of consumer surplus, producer surplus and social or economic surplus.

We defined allocative efficiency as the quantity of any product that maximizes social surplus. Take a look at Figure 1. The monopoly supplies Q M and charges P M. It chooses this price and quantity to maximize profits. But consider this. Is there a consumer who is willing to pay more than the marginal cost to obtain one more unit of output?

The answer is yes. You can see this in Figure 1, starting at Q M ; now consider one more unit of output i. That means that some consumer is willing to pay more than it would cost to produce that additional unit of output. Suppose the firm offers to sell that additional unit for P E. The consumer would get the product and earn D-P E in consumer surplus. And the total social surplus would increase by the additional consumer surplus plus the additional producer surplus or D — MC. What about one more unit of output?

Where does this end? No one captures any of that lost value. How can both of these statements be true? The answer is price discrimination. Price discrimination means charging different prices to different customers for the same product. It a firm has to charge the same price to all customers, P M and Q M will maximize profits.

But if it can price discriminate, it can make even more profits. Think about when a store runs a sale. First, they charge the normal price P M and sell the normal quantity Q M. Sales are an exercise in price discrimination. Three things are necessary for effective price discrimination.

First, the firm needs to have at least some market power. Second, the firm needs to be able to sort the customers into those willing to pay a higher price and those who are no, but who would be willing to pay a lower price.Complete the following table by indicating under which market conditions each of the statements is true.

Note: If the statement isn't true for either single-price monopolies or perfect price discrimination, leave the entire row unchecked.

Check all that apply. Statement Single-price Monopoly Perfect Price Discrimination Barefeet produces a quantity less than the efficient quantity of Ooh boots. Total surplus is maximized. There is deadweight loss associated with the profit-maximizing output. A: A decrease in the demand for apples could be caused by a rise in the price of apples. Demand: It ref Q: Give two examples of opportunity one can face today.

A: Opportunity cost is the cost of next alternative forgone while making decision, i. Solve for what is asked far. Use the space provided for your answer and complete so A: Explicit costs are the payments that are actually made for conducting a business. Implicit costs are Q: Monetary policy can only be effectively designed and implemented in economies that have a fractional A: a The banks in the economy keep a fraction of the total deposit they receive in form of cash in the Q: John has preferences for food F and clothing C described by a utility function.

Suppose that food c Q: The table shows total production of a firm. If units of labour L increase, find below. A: Marginal product of labor is the change in output from employing an additional unit of labor. Q: The Chief Medical Officer has advised the government that consumption of widget-corn improves the suCannabidiol is an unusual phytocannabinoid found in The medical cannabis industry is not entirely new to CBD.

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Since hemp oil and CBD are in its most natural form, it is safe for use in food, cosmetics and dietary supplements. It can even be used for aromatherapy and skin care treatments as well. First-degree price discriminationor perfect discrimination, is the highest level of price discrimination, in which each unit of production is sold at the maximum price that the consumer is willing to pay for that specific unit. The firm will gain the entire market surplus it could possibly achieve, as it will sell all the units for the maximum price at which they could be sold.

This degree of price discrimination will always have as a result a Pareto efficient level of output as marginal willingness to pay will be equal to marginal cost. For this reason and even though monopolies are associated with this strategy, the production level of output will be the same as in a competitive marketand hence, the inefficiency associated to monopolies will be eliminated.

There is not deadweight loss, even though there is not consumer surplus Awhich was extracted by the monopolyand at the end both quantity and price are equal to those that would result from perfect competition.

First-degree price discrimination is, however, quite unrealistic. On the one hand, income elasticity of demand should be equal to zero in order for perfect discrimination to work. On the other hand, there should be imperfect information in the market, since consumers knowing that the price would drop if they showed lower willingness to buy would make them show it, thus making impossible for the monopoly to practice first-degree price discrimination.

Therefore, in real life, the closest thing there is to perfect discrimination is bargaining reductions in prices known as second-degree price discrimination or offering a two-part tariff.

May Lope Gallego. Summary In this second LP on monopolies, we learn about a few more types of monopolies, quite particular ones. We learn about discriminating monopolies, how the implement different prices in order to extract all consumer surplus. We also learn about natural monopolies, which are tricky since they are actually good for society.The fact that price in monopoly exceeds marginal cost suggests that the monopoly solution violates the basic condition for economic efficiency, that the price system must confront decision makers with all of the costs and all of the benefits of their choices.

Efficiency requires that consumers confront prices that equal marginal costs. To contrast the efficiency of the perfectly competitive outcome with the inefficiency of the monopoly outcome, imagine a perfectly competitive industry whose solution is depicted in Figure The short-run industry supply curve is the summation of individual marginal cost curves; it may be regarded as the marginal cost curve for the industry.

A perfectly competitive industry achieves equilibrium at point C, at price P c and quantity Q c. Given market demand and marginal revenue, we can compare the behavior of a monopoly to that of a perfectly competitive industry.

The marginal cost curve may be thought of as the supply curve of a perfectly competitive industry. The perfectly competitive industry produces quantity Q c and sells the output at price P c. The monopolist restricts output to Q m and raises the price to P m. Reorganizing a perfectly competitive industry as a monopoly results in a deadweight loss to society given by the shaded area GRC.

Monopoly II: First degree price discrimination

It also transfers a portion of the consumer surplus earned in the competitive case to the monopoly firm. Now, suppose that all the firms in the industry merge and a government restriction prohibits entry by any new firms.

Price Discrimination- Micro Topic 4.3

Our perfectly competitive industry is now a monopoly. Assume the monopoly continues to have the same marginal cost and demand curves that the competitive industry did. The monopoly firm faces the same market demand curve, from which it derives its marginal revenue curve.

It maximizes profit at output Q m and charges price P m. Output is lower and price higher than in the competitive solution. Society would gain by moving from the monopoly solution at Q m to the competitive solution at Q c.

The benefit to consumers would be given by the area under the demand curve between Q m and Q c ; it is the area Q m RC Q c. An increase in output, of course, has a cost.

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Because the marginal cost curve measures the cost of each additional unit, we can think of the area under the marginal cost curve over some range of output as measuring the total cost of that output. Thus, the total cost of increasing output from Q m to Q c is the area under the marginal cost curve over that range—the area Q m GC Q c. Subtracting this cost from the benefit gives us the net gain of moving from the monopoly to the competitive solution; it is the shaded area GRC.

That is the potential gain from moving to the efficient solution. The area GRC is a deadweight loss. Skip to main content. Module: Monopoly.

Search for:. Reading: Monopolies and Deadweight Loss Monopoly and Efficiency The fact that price in monopoly exceeds marginal cost suggests that the monopoly solution violates the basic condition for economic efficiency, that the price system must confront decision makers with all of the costs and all of the benefits of their choices. Figure Lay people typically say monopolies charge too high a price, but economists argue that monopolies supply too little output to be allocatively efficient.

deadweight loss monopoly price discrimination

In an earlier module on the applications of supply and demand, we introduced the concepts of consumer surplus, producer surplus and social or economic surplus.

We defined allocative efficiency as the quantity of any product that maximizes social surplus. Figure 1. At that quantity, since demand is greater than MC, there remain customers willing to pay more than the marginal cost of additional additional output. Thus if the firm charged addition customers, say P Ethe quantity sold would increase to Q Econsumers would gain consumer surplus, and the firm would gain profit.

The additional social surplus would be the area of the triangle below the demand curve but above the MC curve over the quantity Q M to Q E. Take a look at Figure 1. The monopoly supplies Q M and charges P M. It chooses this price and quantity to maximize profits. But consider this. Is there a consumer who is willing to pay more than the marginal cost to obtain one more unit of output? The answer is yes.

You can see this in Figure 1, starting at Q M ; now consider one more unit of output i. That means that some consumer is willing to pay more than it would cost to produce that additional unit of output. Suppose the firm offers to sell that additional unit for P E.

The consumer would get the product and earn D-P E in consumer surplus.

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And the total social surplus would increase by the additional consumer surplus plus the additional producer surplus or D — MC. What about one more unit of output? Where does this end?

No one captures any of that lost value. How can both of these statements be true? The answer is price discrimination. Price discrimination means charging different prices to different customers for the same product. If a firm has to charge the same price to all customers, P M and Q M will maximize profits. But if it can price discriminate, it can make even more profits. Think about when a store runs a sale. First, they charge the normal price P M and sell the normal quantity Q M.

Sales are an exercise in price discrimination. Three things are necessary for effective price discrimination. First, the firm needs to have at least some market power.

Second, the firm needs to be able to sort the customers into those willing to pay a higher price and those who are no, but who would be willing to pay a lower price. Often firms create a situation where customers reveal themselves.

Why do movie theaters charge lower prices for matinees i. The answer is because they tend to work during the day or have other things to do during weekend days. The last thing necessary for price discrimination is the inability for customers to resell the product. If a grocery store charged a higher price for female shoppers and a lower price for male shoppers, smart females would simply ask their male associates to shop for them.Alberto Moreno could be sidelined for up to six weeks with an ankle injury.

The Liverpool left-back will be assessed by a second specialist over the weekend but the fear is the problem, sustained in Wednesday's 7-0 win over Spartak Moscow, could keep him out until the new year. James Milner is likely to fill the vacancy for Sunday's Merseyside derby at home to Everton while captain Jordan Henderson is set to start in midfield after sitting out in midweek.

Senegalese international Cheikhou Kouyate will be sidelined for Saturday's EPL match against Chelsea. The West Ham midfielder injured a hamstring in Sunday's defeat at Manchester City and will also miss next Wednesday's home game against Arsenal. Seattle Sounders midfielder Osvaldo Alonso has been ruled out of this weekend's MLS Cup final after failing a fitness test on Thursday. Alonso suffered a strained quad in September that he has been dealing with ever since.

He made a substitute appearance versus Vancouver in the Western Conference semifinals but has otherwise been sidelined throughout the playoff push.

UEFA announced on Thursday that Real Madrid defender Dani Carvajal will miss the holder's Champions League last-16 first leg tie after issuing a two game ban for appearing to deliberately pick up a booking.

Carvajal was shown a yellow card in the 90th minute for time wasting in the 6-0 win over APOEL.

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As it was his third, it ruled him out of Wednesday's victory over Dortmund, but in theory would have meant he was available for the round of 16 next February. However, UEFA Control, Ethics and Disciplinary Body found that Carvajal had breached Article 15 of the Disciplinary Regulations. Stoke manager Mark Hughes says Bruno Martins Indi will be out for up to eight weeks as he recovers from a groin injury.

The Netherlands international had to be substituted during last weekend's 2-1 triumph over Swansea. He has started his treatment already, but it will be a long process. Goalkeeper Gianlugi Buffon did not even feature against the Greek side as he continues to recover from a calf injury.

deadweight loss monopoly price discrimination

Stephan Lichtsteiner has also missed the past two games with a muscle injury and is doubtful. Mehdi Benatia returned to training and is no longer a doubt while Mario Mandzukic is now fully recovered from his injury and highly likely to feature against Inter.

Giorgio Chiellini is also likely to return after the flu kept him out of the Olympiacos game. Louis Blues placed goaltender Carter Hutton on injured reserve Friday with a lower-body injury. Hutton, 31, has appeared in eight games for the Blues this season, posting a 4-2-0 record with a 1.

The New York Rangers signed free agent goaltender Marek Mazanec on Wednesday. Mazanec, 26, was assigned to the Hartford Wolf Pack of the American Hockey League. Mazanec has appeared in 31 career NHL games over parts of three seasons, all with the Nashville Predators, recording an 8-13-4 record with a 2. Dallas Mavericks backup center Nerlens Noel underwent surgery on his left thumb and will be sidelined indefinitely.

The operation was performed to repair a torn ligament in the thumb. Coach Rick Carlisle told the team website that Noel will be sidelined at least several weeks.

The 23-year-old Noel is averaging just 4. The Phoenix Suns announced guard Devin Booker will be out of action for two to three weeks following his left adductor strain he suffered in Tuesday's contest against the Toronto Raptors.Select the purchase option. Check out using a credit card or bank account with PayPal.

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12.10: Price Discrimination and Efficiency

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deadweight loss monopoly price discrimination

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