Economics Micro & Macro (CliffsAP)

Figure 10-6

The monopolist maximizes profits by producing at Q1, or where MC = MR. Economic profit is realized where the ATC
curve reaches its minimum point. Profit per unit is at Q1, and economic profit is the shaded region.

The AP exam expects you to interpret or construct graphs illustrating government intervention. Where ATC = P is con-
sidered the fair market price by the government.

Price Discrimination

Price discriminationis when a monopolist charges different prices for a product to different buyers even though the
production and transaction costs remain unchanged. To price-discriminate, a firm must have market power. Price dis-
crimination can take place only when certain conditions are met:

■ A monopolist has to have power:The seller must have outright monopoly power or, at the very least, possess an

original product or idea to be able to control output and price.

■ Separation of market must be attainable:The monopolist must be able to sway buyers into becoming depen-

dent on its product. Elasticities of consumers will vary, but all consumers in the monopolist’s market will need to

rely on the monopolist’s product.

■ Redistribution of product must be forbidden:When buyers purchase the product from a monopolist, they must

not be able to resell the product or service. The reselling of the product or service compromises the power of the

monopolist, and it undermines the strategy of cornering the market.

A monopolist can take part in different types of price discrimination. From movies ticket discounts for students to golf
courses that offer senior discounts for the elderly, price discrimination is present in the U.S. economy—and not just at a
monopolist’s level.

Price discrimination works by appealing to different elasticities. How much is someone really willing to pay for your
product? Senior citizens have a typically more elastic demand curve than the general public. This is mainly because
seniors live on a fixed income. This fixed income gives them less flexibility when it comes to dealing with prices. So
when something becomes too expensive, seniors either find a close substitute or simply do without it. A monopolist
may want to offer seniors a lower price because of their high elasticity. While offering the general public the exact
same product at the exact same costs of production, the monopolist may elect to charge the general public a higher
price because of a more flexible income.

Figure 10-7 shows two demand curves with varying elasticities.

Quantity

MC

ATC

MR D

Costs, Revenue and Prices

p^1

p^2

p^3

p^4

0 Q^1

Economic

Profit

Economic

Profit

Product Markets and Profit Maximization