In: Economics
Please show me your thought process. Please explain it as if you are telling it to someone who has no clue about economics.
Monopoly is a market situation in which there is only one seller of a product with barriers to entry of others. The product has no close substitute. price discrimination means charging different prices from different customers are for different units of the same product. price discrimination is possible when the monopolist sells in different markets in such a way that it is not possible to transfer any unit from the cheap market to the dearer market.
Limitations of monopolies:
1. price discrimination is however harmful to society when it leads to Mal distribution of resources as between different users with the result that output employment and income or not maximized.
2. It may lead to diversion of resources from the socially optimal uses.
3. it leads to exploitation when people are made to pay higher prices for small quantities.
4. even on international plane when price discrimination takes to form of dumping it deliberately shutters the economy of the other country by undercutting the foreign producers and forcing them to close the business. Such discrimination is highly undesirable
Despite the shortcomings monopolies should be left alone. There are certain benefits from monopoly:
1. Benefits to society
in many cases when there is perfect competition or simple Monopoly production of a certain community is not possible because its average cost curve lies above the demand curve. but under price discrimination the average cost curve is likely to be below the average revenue curve at some point. does if there was no price discrimination society would be deprived of the use of certain commodities and services. it may happen for instance that a railway would not be built or a country doctor would not set up in practice of discrimination were forbidden. from the point of view society it is only necessary that the concern should make sufficient profits to make deficiency of the plant and not a profit which would have been sufficient to justify the original investment. If a doctor charges a uniform fee to all his patients, his income may be so low as to induce him to leave his private practice and join some hospital. the community is does deprived of his services in the particular area where he is practicing.
2. Economic welfare
Price discrimination is justified if it helps in promoting economic welfare. government usually permit or even Anchorage price discrimination if it leads to the production of some public utility services. in public utility services the higher income groups at charge higher prices and the funds so collected may be used to subsidize the goods meant for the poor.
3. Reducing inequalities
price discrimination is also beneficial to society for it helps in reducing the inequalities of personal income when higher prices are charged to the rich than to the poor. in public utility services the higher prices charged to the higher income groups serve as a tool for income redistribution because the government may use these funds to provide subsidies to the lower income groups.
4. Through dumping
Monopoly is not only beneficial but is also justified when a country sells a commodity cheaper abroad than at home. If a foreign market is elastic more will be sold at a lower price. It means expansion in output, the use of larger resources of the economy, employment and income to the community.