Out of all the market structures, monopolies have the most control over price and quantity.
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Alright, so now let's discuss revenue for a monopoly firm, including the ideas of average revenue and marginal revenue. Okay, so, as we saw a monopoly faces a downward sloping demand curve right, downward sloping. Unlike what we saw in perfect competition, right? In perfect competition, we saw that the firm faced a flat demand curve, right? There was a flat demand curve in perfect competition to the firm here, the firm has a downward sloping demand curve. Okay, so when we have a downward sloping curve, uh demand curve, and we change the price, there's gonna be two effects. We're gonna talk about the price effect and the output effect. Now, we've gone into great detail about this before, actually, it was in a video, I think it was called total revenue test, and this was back when we were discussing um elasticity, we went into detail about this price effect and output effect. So, if you want a lot more detail, you can go to that video to review price effect and output effect. But we're kind of gonna discuss the logic here. So, let's think about what happens if we decrease the price in a situation where we have this downward sloping demand curve, what we're gonna have two effects, price effect and output effect First, let's think about the price effect. If we decrease the price, that means we're gonna earn less revenue for each unit, we sell right every unit we sell, we're selling at a lower price, so we're gonna get less revenue compare that to the output effect, which these two are always going to be opposite if the price effect is bringing down revenue, the output effect will be increasing revenue and then opposite. Right? So the output effect. Well, when we lowered our price, we're gonna sell more units right at the lower price. So the price effect is that we lower, we have that lower price per unit. But the output effect, well, we're gonna sell more units, right? So we're gonna earn more revenue from the amount of units we sell. But it's gonna be at a lower price. Okay. So you can imagine with a price increase, it would be the opposite. The price effect would earn us more revenue because we're selling each unit for more money. But since we increase the price, we're selling less, Right? So the output effect would be less in that case. So, if you want more details again, go to that video, But but the key, the key thing here is that the the price effect and the output effect makes it so that the marginal revenue to the monopolist is always gonna be less than the price of the good. Okay, so that price is going to be greater than marginal revenue. Okay, so that's the idea here. And one thing I want you to notice if you guys have already studied monopolistic competition, which is another one of our market structures everything that we discussed in this video is exactly the same as the video for monopolistic competition revenue. Okay, we're talking about the exact same thing. I literally copy and pasted the whole page, Savage. Like, no, I didn't care at all. I just copied everything and just changed our title here from monopolistic competition to monopoly revenue. Okay, So you're gonna see that they completely parallel each other. And if you haven't studied it yet, well, monopolistic competition, you're gonna see is gonna be exactly the same. All right. So, let's go ahead. And in the next video, let's do a little example. So I can show you in the table and on the graph what are marginal revenue looks like how it's always going to be less than the price and how the curve comes out on the graph. Okay, So let's do that now in the following video.
Monopoly and Marginal Revenue
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Alright, So here we have a market for cable subscriptions. So we can imagine we're in some small town where there's only one cable provider for your cable tv and they have a monopoly over cable subscriptions in this small town. Now, in my example, it's really simple. It's a really small town. We're gonna talk about anywhere from 0 to 5 subscribers, but we're just keeping it simple just to keep the math easy. And we're gonna reach the same conclusions anyways. Okay, so one more thing to note, and I mentioned this in the previous video. If you did monopolistic competition already, if you did the other market structure monopolistic competition, it's exactly the same. I'm even using the same example here. No cares given. All right. So let's go ahead and and dive right in. So, we've got we've been given some quantities and prices here. Right? And notice that as the quantity increases the price decreases, right? This is that law of demand, um we have to we have to decrease the price to increase the quantity. Right? So let's go ahead and discuss with total revenue, average revenue and marginal revenue in these cases. So, we've got our formulas here, total revenue, we've discussed before that price times the quantity. So let's go ahead and do some multiplication here. Zero times 80. Right, total revenue is going to be zero. There, there was no sales. How about when we have one subscriber paying 70. Well, that's gonna be 70 right, two times 61, times 50, that's 1 54 times 40 is 1 60 then five times 30 is 1 50 there. Right? So you can see that the total revenue was increasing increasing to a point and then it decreased again. Right? Um So let's talk about average revenue and remember when we we proved out that average revenue just equals price. Right? The total revenue divided by quantity where total revenue is price, times quantity, right? That's what total revenue equals price, times quantity. All these quantities just go away and we're left with just price. Okay, So we could just double check here and we could um well in this case you can't divide by zero but we could just test it just in case. Right, So we take our total revenue of 70 divided by our subscribers of one and we're gonna get 70. Right? That is the price. Also write the price was 70 Average revenue is 70. How about the next 11 20 divided by two, gets us 60. Right and 60 again is the price. So there you go. You're gonna see that the average revenue is always gonna just equal the price. 50, 40 and 30. Right? All the way down, average revenue just equals price. Okay, And that average revenue is our demand curve. Right? So notice here, if we go to the curve at one quantity, right, one subscriber, we're at 70 right? And that is our average revenue here to subscribers were at 60 and that's our average revenue three. Right? So you see that at each of these points we are um on our demand curve there. So our demand curve is this curve that we've got here and it's equal to average revenue. Okay, so our demand curve is our average revenue. Now let's think about our marginal revenue. Okay, so marginal revenue. Right, this is going to be the change in total revenue, change in total revenue over change in quantity. Right? But in general this change in quantity is just gonna be one, right? We're just increasing by one subscriber each time. So it's really just, what is the change in total revenue? So let's look at that now. So in the first case right, we had zero revenue and then we went up to 70 revenue when we got our first subscriber. So our marginal revenue there was 70 right? We added one subscriber and we got 70 more revenue. How about when we added the second subscriber? Well, our revenue was already 70 and we added another 50 right to get up to 1 20. 1 20 minus 70. Is that 50 in marginal revenue? The next one we already had 100 and 20 in revenue and it got us up to 1 50. So the 1 50 minus the 1 20 is another 30 in revenue. And how about the next one? Well, we already had 1 50 then we went up to 1 60 right? So we got an additional 10 in revenue there. And how about this last one? We were at 1 60 and we went back down to 1 50 right? We lost some marginal revenue there. So we had negative marginal revenue, negative 10 marginal revenue. So look at this, marginal revenue is not constant, right? In perfect competition, marginal revenue was always just the price, price, price, price was marginal revenue. But here, since we have a downward sloping demand curve, our marginal revenue is decreasing. Okay, So let's go ahead and draw this marginal revenue curve on the graph. So we had one subscriber quantity of one, we were at 70. Let me erase these points here. And then when we had to subscribers, marginal revenue was 53 subscribers. We were down at 30 10 and then it was like negative 10. So it went under the graph there. So, if we connect these points right here, right? Something like that, where we've now drawn in our marginal revenue curve. Okay, so there you go. The marginal revenue curve is less than the demand curve, right? It's a different shape and it's always gonna kind of do what we see here is gonna have like more of a slope and it's gonna come down just under the demand curve like that. Okay, so, we'll see more examples of marginal revenue, but the key here is that this is unlike perfect competition, right in perfect competition. We saw that the marginal revenue equaled the average revenue, equaled the price, and there was that flat demand curve. No longer. Right now, we've got the downward sloping demand curve and marginal revenue underneath it. Okay, so that's gonna have some implications. Remember when we're thinking about profit maximizing marginal revenue, equally marginal cost. So we're gonna see how this has implications on what we're going to produce, how we maximize profit. Alright, So before we move on, let's go ahead and do some practice video, practice problems about this topic. And then we'll go on to discussing profit. All right, let's do that now.
Which of the following statements is true?
A monopolist’s demand curve is more elastic than the market demand curve.
For a monopoly, an increase in the quantity sold will always increase total revenue.
The barriers to market entry in perfect competition are similar to those for a monopoly.
A monopoly’s marginal revenue is less than its average revenue.