Marginal Revenue & Monopoly

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Presentation transcript:

Marginal Revenue & Monopoly

Marginal Revenue Marginal Revenue (MR) – additional revenue gained from selling one more unit MR = ∆ in Total Revenue/ ∆ in Quantity Sold Example: Firm sells 5 more T-Shirts at $20 each MR = $100/5 units = $20

Marginal Revenue Handout

Demand > Marginal Revenue If a monopoly wants to sell more, it must lower price Price falls for ALL units sold. Price $11 10 Example: Lower price from $8 => $7 to sell 1 more unit 9 8 7 Old TR $24 ($8 X 3) New TR = $28 ($7 X 4) MR = $4 6 5 4 3 D 2 1 MR This is why P ≠ MR –1 1 2 3 4 5 6 7 8 Quantity of Water –2 –3 –4

Profit Maximization All profit-maximizing firms set: MR =MC Competitive firms: P = MR = MC set Price = MC Monopoly firm = P > MR = MC Set MR = MC P > MR P = MR

Profit Maximizaton MC MC Set P = MC ------------- Set MR = MC --------------------- ------------- E1 Set MR = MC ------------- E1

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