Revenue in Monopolistic Competition
Monopolistic Competition Revenue
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Alright, now, let's discuss some of the key ideas about revenue in monopolistic competition. Alright, so, before we dive in here, I just want to make a point if you've already studied monopoly market structures. Well, this is the same exact page revenues for monopolistic competition, and revenues for monopolies are exactly the same. We do all the same things here. Um there's just the implications of that overall market structure, right? Where a monopoly is the only producer in the, in the whole market and monopolistic competition? Well, there is other competitors in this market where monopoly doesn't have that competition. However, you're going to see that we treat revenue just the same. And on top of that, we calculate profit just the same as we do with a monopoly. Alright, so, let's dive in here, and you're gonna see all the similarities, if you haven't done monopolies yet? Well, I'm gonna do the same little spiel when you see that video. All right, So, what we're gonna see is that firms in a monopolistic competition face a downward sloping demand curve, Right? That's what we saw when we first discussed our demand curves downward sloping demand curve, and we're gonna talk about a price decrease, Right? So, we saw that we had a downward sloping demand curve and we're gonna have effects on our quantity and our price when we're when we're changing, right, because it's downward sloping. Well, we're gonna talk here about what happens when we decrease price. And now we've gone into more detail about this price effect and output effect in this video called total revenue test, and this was back when we were studying elasticity. Okay, We went through the price effect and output effect. But let's kind of just go over it on a high level here. If you want more information, you can go back to that video and we go into a law more detail. Okay? So if we're going to decrease the price, what's gonna happen? We're gonna have two effects on our demand, right? Or excuse me, on our revenue. So the first thing that's gonna happen is the price effect, right? So we decreased our price. So we're going to get less revenue per unit, right? There's gonna be a lower price. So every unit we sell, we're gonna sell at a lower price and earn less revenue, right? We earn less revenue per unit sold, right at that lower price. But the other side effect is the output effect, right? These are always gonna be opposite of each other. If the price effect lowers our revenue, the output effect is going to increase it, right? And the idea here is at that lower price, we're gonna sell more units, right? Because we lowered the price, the demand, the quantity demanded is going to increase, right? And it would be the opposite for a price increase. You could imagine if we were going to increase the price, Well, the price effect would get us more revenue, right? Because it's a higher price, bringing in more revenue per unit. But since it's a higher price, we don't sell as many. Right? So the output effect would have been less revenue in that. Okay, So what this tells us is that in a monopolistic lee competitive market, the firm's marginal revenue is always less than the price of the good. And that's because of this price effect and output effect, right? There's always going to be this one factor that's lowering our revenue and we can't keep that constant marginal revenue. Like we saw in perfect competition. Okay, so let's go ahead and dive in to this idea of less marginal revenue here. Let's go ahead and dive into an example and see what that means. Alright, well, actually, let's pause right here and we'll start it up in the next video. Alright? We'll do the example just right now. Cool, let's do it.
Monopolistic Competition Marginal Revenue
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Alright, So this is the same example that we do in the monopoly uh, chapter as well. Okay, But here we're going to say it's a market for cable subscriptions. When we dealt with a monopoly. I said that it was maybe the only provider of cable for a small town, right? They were the only provider, so they had, um, full control over that market in a monopoly. We'll hear in monopolistic competition. The difference is gonna be that there are other cable providers, right? So maybe you're in a, in a bigger city and you don't have just one option, right? You might have a couple different cable companies. Maybe you can get satellite tv, right? They're each gonna be differentiated in what channels they offer, what, what products they offer to you, movie channels. Um, but they are also going to be similar, right? In that they're they're offering you, uh, television programming. Cool. So, we're gonna keep our example simple here, we've got a different amount of subscribers, right? And as we increase, excuse me, As we decrease the price here, right? As the price is decreasing, Notice that the quantity of subscribers is increasing, right? Lower prices, means more subscribers. Cool. So let's go ahead and calculate some of our revenue numbers. So, first, let's start here with total revenue. And we've discussed this before that, it's just price times quantity. Right? So we're just gonna do some multiplication across here, the price being 80. Well, there's zero subscribers. So there's zero revenue when a price is 70 with one subscriber, right, 70 times one. We're gonna get 70 60 times two is 1, 2050 times three. That's 1 50 40 times 41 60. And then 30 times five is 1 50 again. So you notice it was increasing increasing to a point and then started decreasing again. Right, Well, when we do it like this, it's pretty clear to see where we're making the most revenue. Right? Obviously at four units we've got the most revenue. Um but what we're usually gonna do is deal with this on the graph. Okay, so let's go ahead and finish up our average revenue and our marginal revenue and then we'll check these out on the graph. So let's go ahead and calculate average revenue. And remember that average revenue is just equal to price. And we've proved that out in the perfect competition chapter. When we were talking about revenue, we proved out how average revenue equals price and that's just a total revenue divided by the quantity. And we'll just double check it here. Okay, well quantity is zero here. We can't divide by zero. So there's not gonna be an average revenue here. How about the next one? Our total revenue was 70 divided by one subscriber. Well, that equals 70. Right? Total revenue divided by quantity is 70 there and that equals our price. Right? Price of 70. Price of 70 average revenue of 70. Right? So let's see if this continues. How about the next one? Total revenue of 1, 20 divided by quantity of 21 20 divided by two is 60. Right? And 60 is our price. Right? So average revenue equals price and that's gonna keep going all the way down here. Price was 50. Their price was 40 Price was 30. Okay, so what does this show us? Is that the average revenue is equal to our demand curve? Right. So this curve that I've shown over here is our demand curve Which is equal to put average revenue equals the demand curve. Right? Price equals average revenue equals the demand curve. Cool. Alright, so look, these are all the points that we have when we had one subscriber here, we had average revenue of 70 right to subscribers. Average revenue of 60, average revenue of 50 with three. Right, so there is our demand curve and it has to be with that average revenue. Okay, so our prices shown on on our demand curve. How bout our marginal revenue curve? Let's check that one out now. So remember marginal means what happens when we add one? So if we add one more unit, how much more revenue are we going to get? Right, So we're gonna change our quantity, our change in revenue over our change in quantity where this change in quantity is usually gonna be one. Right? Most of our examples. Can't see that one. Right. Um so let's go ahead and do that. Let's see what it is. Our change in quantity is always one. So we just need to find our change in total revenue here. Okay, so our total revenue was zero when we had zero subscribers and then it went up to 70. Right? So it went from 0 to 70. Are marginal revenue is 70 there for that first unit. Right? We can't do it for the first one because there was there's nothing before it, right? There's no change in the first one. We're only looking where there's change in number of units. Okay, how about the second unit? The second unit, we already had 70 in revenue and then we sold the second unit and it brought our total revenue up to 1 20. Right? So we got an extra 50 in revenue. 1 20 minus the 70. That gives us an extra 50 in revenue. How about the next one? We already had 1 20 in revenue and it got up to 1 50. So that's an extra 30 in revenue. Right? 1 20 to 1 50 there's 30 increase there. How about from 1 50 to 1 60? Well, it increased by 10. Right? It was 1 51 up to 1 60 that's a 10 increase. And then the last one we were at 1 60 and then it went down to 1 50. Right? So we have negative marginal revenue. We've lost revenue by adding this next unit. Okay, so marginal revenue can get negative like that. And what we're gonna end up seeing is a marginal revenue curve, something like this. So, at one unit we were at 72 we were at 50 At three, we're at 34, we're at 10 and five were negative. So we would have been somewhere under the graph there. So, we're gonna end up with some marginal revenue curve that looks like this. Let me do it with this. Let's see if this works. I haven't tried this yet. All right. That that's kind of cool. I don't like it too much. So, actually, I'm gonna draw it in by hand. So are marginal revenue curve is decreasing their something like that and notice that it's under under our demand curve. Right? It's always gonna be less than our demand curve. That's just how this works. The marginal revenue is always gonna fall under the demand curve. And that has to do with that downward sloping demand. Okay, so, our marginal revenue is gonna keep decreasing like that. And you can tell that that's gonna have some implications when we start dealing with profit. Right? Rem remember that the key point when we're talking about profit and perfect competition was marginal revenue equals marginal cost. And now you can see that this is going to have some effect on that calculation in this chapter. All right. So, that's that's the main takeaway here, is that that marginal revenue curve falls under the demand curve. Okay, it's gonna always be less than the demand. So let's go ahead and do some practice before we move on to calculating profit. Alright, let's do that now.
Which of the following statements is true?
A monopolistically competitive firm's demand curve is equal to the market demand curve.
For a monopolistically competitive firm, an increase in the quantity sold will always increase total revenue.
The barriers to market entry in perfect competition are more stringent than those for monopolistic competition.
A monopolistically competitive firm’s marginal revenue is less than its average revenue.
In monopolistic competition, firms have ________ power to set the price of its produce because ________
No; there are no barriers to entry
Some; of product differentiation
No; of product differentiation
Some; there are barriers to entry