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
10 of 34
…
Table 1 here
…
Figure 3 here
…
Figure 3 – Demand and Marginal Revenue Curves for a Monopoly
The demand curve
shows how the quantity affects the price of the good.
The marginal revenue
curve shows how much a monopoly firm's revenue changes when the quantity increases
by each extra 1 unit sold.
Because the
price on all units sold must
fall if the monopoly increases production, marginal revenue is always less than
the price.
…
Figure
3 graphs the demand curve and the marginal revenue curve for a monopoly firm.
This figure uses
the data of Table 1.
The
demand curve is also the average revenue curve, average revenue equals price.
These
two curves start at the same point on the vertical axis, because the marginal
revenue of the first unit sold equals the price of the good.
The
monopoly's marginal revenue on all additional units after the first is less
than the price of the good.
…
We confirm
this by reviewing Table 1.
When
price is $11 this price is too high for anyone to buy.
When
price is lowered to $10 one person will buy, revenue becomes $10.
When
price is lowered to $9 two people will buy, revenue becomes $18.
Note
price has gone down to $9 but revenue has gone up by $8.
When
price is lowered to $8 three people will buy, revenue becomes $24.
…
As
shown in Figure 3, a monopoly's marginal revenue curve lies below its demand
curve.
Figure
3 is a graph of Table 1 columns 2 and 5.
As shown
marginal revenue can even become negative, producing and selling an additional
product decreases total revenue.
…
As a monopoly increases quantity sold, there are two
effects
· output effect: more output is sold,
so quantity is higher, which increases total revenue
· price effect: the price falls, so
price is lower, which decreases total revenue
Marginal
revenue for a monopoly is negative when the price effect is greater than the
output effect.
When
the firm continues to produce an extra unit of output, even though the firm is
selling more units eventually the price falls by enough to cause the firm's
total revenue to decrease.
As
shown in Figure 3 and Table 1 this happens when increasing production from 5 to
6 units, total revenue begins to decrease.
… …
Comments
Post a Comment