Econ FAQ #1 How to draw the price discrimination diagram

How to draw the price discrimination diagram

Many students find it difficult to draw the price discrimination diagram. I think it’s mainly because there are three different diagrams that are linked together with different prices and quantities. If you’re one of those students, follow the steps outlined below, practice it a few times, and you’ll see that it’s not that difficult after all 🙂

 

Price Disc

[click on the diagram to enlarge]

 

  1. Draw:

(i) Market A – a market with inelastic demand – therefore, a steep AR and MR

(ii) Market B – a market with elastic demand – therefore, a flat AR and MR

(iii) Combined Market – combine AR and MR of Market A and Market B

  1. Draw MC in the combined market – MC must cut the MR after the kink
  2. Find MR=MC in the combined market:

(i) draw a horizontal line from MC=MR to the price axis find MC*

(ii) draw a vertical line from MC=MR to the output axis find and Q*

(iii) extend Q* to AR to find P*

  1. Extend P* to market A and B and find q* in market A and B
  2. Extend MC* to market A and B
  3. Find the point where MC* line cuts MR in each market to find the market Q and P

(i.e. PA and QA in market A and PB and QB in market B)

  1. If drawn correctly:

PA > P* and QA < Q* in the Inelastic Demand Market

PB < P*and QB > P* in the Elastic Demand Market

 

This is what it should look like:

Price Discrimination Diagram

[click on the diagram to enlarge]