ashali14
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http://files.physicsandmathstutor.co...20Monopoly.pdf

what does the third graph of 3rd degree price discrimination show (3rd page)
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KevinLonge
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(Original post by ashali14)
http://files.physicsandmathstutor.co...20Monopoly.pdf

what does the third graph of 3rd degree price discrimination show (3rd page)
I think that this version of the graph allows for a better explanation:
http://www.economicsonline.co.uk/Bus...ation-SNP2.png

As you can see, the monopolist will charge a relatively high price in the inelastic sub-market in order to maximise total revenue in that market, as you know that when demand is inelastic, increasing the price (up to a point) will increase the total revenue. We can then see that the monopolist will charge a relatively low price in the elastic sub-market, as you know that when demand is elastic, decreasing the price (or just charging a lower one) will increase total revenue. If you add up the red boxes from the inelastic sub-market and elastic sub-market, you get the total revenue of both the sub-markets added up (let's say that by adding up those two red boxes you get £150 of total revenue).

The graph on the far right shows a monopolist who cannot price discriminate. This means that they won't be charging the inelastic consumers the highest price possible, and they won't be charging the elastic consumers the lowest price possible, but instead, they will just be going half the way on each (P2 is between P and P1). This means that the monopolist on the right (who cannot price discriminate) will only have total revenue of the red box (say £100) on the right diagram, which is clearly less than the monopolist who could price discriminate as they got the red boxes on the left and in the middle (which added up to £150).

The diagram is essentially just showing that a monopolist has an incentive to partake in third degree price discriminate if there are two sub-markets (with different price elasticities) that they can exploit, as doing so will provide them with larger total revenue than if they didn't.

Hope that helps
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TeeEff
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(Original post by ashali14)
http://files.physicsandmathstutor.co...20Monopoly.pdf

what does the third graph of 3rd degree price discrimination show (3rd page)
The third graph shows you the costs and revenues for the whole market. Since your costs don't change whether you have a uniform pricing scheme or operate with price discrimination, the firm makes more profit by charging the price inelastic customers more and the price elastic customers less. If the combined area of profit for the segments is larger than the area of the combined segment, you can see the firm has made more profit than having uniform pricing.
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ashali14
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safe man nice explanantion
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