(a la Pigou)
Every item is sold
at a different
price, so TR is the
area under the
demand curve out
to where
MC=MR(=D).
$
AR
MC
AC
MR=D
0
Q
(a la Pigou)
This is very
theoretical and
implies much
monopoly power
(not to mention a
utilometer).
$
AR
MC
AC
MR=D
0
Q
(a la Pigou)
$
Second degree
discrimination is similar
to the block rate in public Ph
utilities. There is a
Pc
commercial electricity
rate and a household rate.
0
It can capture some
consumer surplus as
profit.
CS
Household P >
Commercial
price. (Revenues,
shaded, reduce
CS, but increase
NR for the firm.
Q
(a la Pigou)
For 3rd degree
price
discrimination, we
will assume (for
simplicity) only
two markets.
So draw 2 sets of
revenue curves.
$
AR2
MR2
0
AR1
MR1
Q
(a la Pigou)
$
MR
2. Sum MR curves
(MR).
Above this
p, there’s
only one
MR
AR2
MR2
0
AR1
MR1
Q
(a la Pigou)
$
One point on MR line.
Another MR point.
2. Sum MR curves
(MR).
AR1
MR2
0
MR1 AR2
Q
MR2
MR1
d2
d1
If each MR curve (at the horizontal
line where the two intersect) is one
half way outMR
to its
respective
demand
Horizontally,
=
1/2
d
,
and
MR2 = 1/2 d2
1
1
curve,
two
demand
since
1/2 the
+ 1/2
= 1,
MR1 +curves
MR2 =are
d1 =just
d2 = mr
twice as far out from the vertical axis
where they will also intersect.
(a la Pigou)
Now, simply
connect the two
points shown and
get the mr we
have been looking
for.
$
One point on MR
Another mr point.
MR2
0
AR2
MR1
AR1
MR
Q
(a la Pigou)
$
3. Add MC and
AC curves… and
find the output
where MC = MR.
MC
r
MR2
0
AR2
AC
AR1
MR1 mr
Qt
Q
(a la Pigou)
$
Assume
two AC
3.1.Add
MC and
2.
Sum MR
curves
markets
(draw
2 sets
curves…
and
find
the
4.(MR).
Find
MR
=
MC
(= r)
1 curves).
of
revenue
output
where
MC
=r)
Find
MR
=
MC
(=
2
MR.
p2
p1
r
mc
ar2
mr2
0
q2 q1
ac
mr1
Qt
ar1
mr
Q
(a la Pigou)
Profit in market 1:
TR1 - TC = NR1 or...
$
p1(q1) - c(q1) = NR1
or the shaded area
p1
p2
c
mc
ar2
mr2
0
q2 q1
ac
mr1
Qt
ar1
mr
Q
(a la Pigou)
$
Profit in market 2:
TR2 - TC = NR2
or...
the shaded area,
p2(q2) - c(q2) = NR2
p2
p1
r
c
mc
ar2
mr2
0
q2 q1
ac
mr1
Qt
ar1
mr
Q
(a la Pigou)
$
Total NR:
NR1 + NR2
= p1q1 - cq 1 + p2 q2 - cq 2
or, the shaded areas.
p2
p1
r
c
mc
ar2
mr2
0
q2 q1
ac
mr1
Qt
ar1
mr
Q
(a la Pigou)
But wait!
There is a simpler
method for wimps!
(a la Pigou)
MC
MR1
D1
MR2
1. Determine MC for total output,
D2
(a la Pigou)
MC
MR1
Q1
MR2
D1
D2
Q2
2. Equate MC to MR in each market to find
the correct output for each market,
(a la Pigou)
P1
P2
MC
MR1
Q1
MR2
D1
D2
Q2
3. The output line extended up to the D
curve indicates each market’s price.