Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior
and the Organization of Industry
Chapter
15 of 36 Monopoly
Section
9 of 34
…
Table 1 here
…
Marginal
revenue for monopoly firms is different from marginal revenue for competitive
firms.
When
a monopoly increases the amount it sells, there are two effects on total
revenue, which equals price (P) x Quantity (Q)
The price effect: P falls, which decreases total revenue.
The output effect: more output is sold, Q rises, which increases total revenue.
…
For
a competitive firm, it must sell at the given market price, so there is no price
effect.
When
it increases production by one unit it receives the previous same market price
for that unit.
It
does not receive any less for the units it was already selling.
Because
the competitive firm is a price taker, its marginal revenue equals the constant
price of its good.
…
When
a monopoly increases production by one unit it must reduce the price it charges
for every unit it sells.
This
price reduction reduces revenue on the units it was already selling.
Per
Table 1, as a result as it increases quantity a monopoly's marginal revenue is
less than its price.
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