IGCSE Economics Paper-1: Specimen Questions with Answers 8 - 8 of 27

Question number: 8

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Essay Question▾

Describe in Detail

What is price discrimination? How a monopolist charges prices in different markets? Describe its different categories.

Explanation

Price Discrimination:

  • Price discrimination is when a monopolist charges different prices for the same product from different consumers or industries. According to Koutsoyiannis, “Price discrimination exists when the same product is sold at different prices to different buyers. “

  • Price discrimination is possible when price elasticity of demand is different in two markets. In these two markets, marginal revenue of the product will be different. Marginal revenue will be more in one market and less in other market. The monopolist will transfer the product from less marginal revenue market to high marginal revenue market.

  • If there are two markets- market A and market B. Market A has less elastic demand and Market B has more elastic demand. Therefore marginal revenue will be less in market A where price elasticity of demand is less and high in market B where price elasticity of demand is more.

  • Price discrimination in case of two markets can be shown in the following diagram.

The Market A, B, C

The Market a, B, C

  • Suppose there are two markets- Market A and Market B. Demand is less elastic in Market A than Market B. AR and MR are average revenue and marginal revenue curve. The aggregate of both the markets are shown in the above diagram. Monopolist is in equilibrium at point E where Marginal revenue is equal to Marginal cost.

  • OP is the equilibrium price and is the equilibrium output. The total output will be distributed in both the markets. As the marginal revenue is less in market A and more in market B. It will be profitable for the monopolist to transfer the output from market A to market B.

  • The Monopolist will sell quantity in market A at OP0 price and quantity in marker B at OP price. Total quantity will be sold at OP price.

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