Monopoly Revenue: Marginal and Average Revenue in Monopoly Markets

Monopoly Revenue

Understanding Monopoly Demand and Revenue

A monopoly faces a downward-sloping demand curve, meaning it must lower its price to sell additional units. This creates unique effects on the firm's revenue compared to firms in perfectly competitive markets.

• Price Effect: When a monopolist lowers its price, it earns less revenue per unit sold because the price is reduced for all units sold.

• Output Effect: By lowering the price, the monopolist can sell more units, increasing total revenue due to higher quantity sold.

However, the marginal revenue (MR) for a monopolist is always less than the price of the good ($MR < P$), because the price reduction applies to all units sold, not just the additional unit.

Key Terms and Formulas

• Total Revenue (TR): The total amount received from sales, calculated as $TR = P \times Q$.

• Average Revenue (AR): Revenue per unit sold, which equals the price in monopoly: $AR = \frac{TR}{Q} = P$.

• Marginal Revenue (MR): The additional revenue from selling one more unit: $MR = \frac{\Delta TR}{\Delta Q}$.

Example: Market for Cable Subscriptions

The following table illustrates how a monopolist's revenue changes as it sells more units at lower prices:

Subscribers (Q)	Price (P)	Total Revenue (TR = P × Q)	Average Revenue (AR = TR/Q = P)	Marginal Revenue (MR = ΔTR/ΔQ)
1	80	80	80	--
2	70	140	70	60
3	60	180	60	40
4	50	200	50	20
5	30	150	30	-50

Interpretation: As the monopolist increases quantity, price falls. Marginal revenue decreases and can become negative if price falls too much.

Graphical Representation

• The demand curve is downward sloping, showing the inverse relationship between price and quantity demanded.

• The marginal revenue curve lies below the demand curve for a monopolist.

Practice Question Analysis

• a) A monopolist's demand curve is more elastic than the market demand curve. (Incorrect: The monopolist faces the market demand curve, so their elasticity is the same.)

• b) For a monopoly, an increase in the quantity sold will always increase total revenue. (Incorrect: Total revenue increases only if MR is positive; if MR is negative, TR decreases.)

• c) The barriers to market entry in perfect competition are similar to those for a monopoly. (Incorrect: Monopolies have high barriers to entry; perfect competition has none.)

• d) A monopoly’s marginal revenue is less than its average revenue. (Correct)

Summary Table: Monopoly vs. Perfect Competition

Characteristic	Monopoly	Perfect Competition
Demand Curve	Downward sloping (market demand)	Perfectly elastic (horizontal)
Marginal Revenue	Less than price ($MR < P$)	Equals price ($MR = P$)
Barriers to Entry	High	None

Key Takeaways

• Monopolists must lower price to sell more, causing MR to fall below price.

• Marginal revenue can become negative if price is reduced too much.

• Barriers to entry protect monopolies from competition.

Additional info: In monopoly, the marginal revenue curve always lies below the demand curve because the monopolist must lower the price on all units to sell an additional unit. This is a key distinction from perfect competition, where firms are price takers and MR = P.