Monopoly Revenue: Price Effect, Output Effect, and Marginal Revenue

Monopoly Revenue Concepts

Monopoly Demand Curve and Revenue Effects

A monopoly faces a downward-sloping demand curve, meaning that to sell more units, the monopolist must lower the price. This creates two distinct effects on revenue when the price changes:

• Price Effect: The firm earns less revenue per unit sold because the price decreases. This effect reflects the loss in revenue from lowering the price on all units sold.

• Output Effect: The firm earns more revenue because it sells a greater quantity at the lower price. This effect reflects the gain in revenue from selling additional units.

For a monopolist, marginal revenue (MR) is always less than the price of the good ($MR < P$), because increasing output requires lowering the price on all units sold, not just the additional unit.

Key Terms and Definitions

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

• Average Revenue (AR): Revenue per unit sold, calculated as $AR = \frac{TR}{Q}$ (for a monopolist, $AR = P$).

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

Example: Market for Cable Subscriptions

Revenue Calculations for a Monopolist

The following table illustrates how a monopolist's revenue changes as quantity increases and price decreases:

Subscribers (Q)	Price (P)	Total Revenue (TR = P × Q)	Average Revenue (AR = TR/Q = P)	Marginal Revenue (MR = ΔTR/ΔQ)
1	80	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, the price must decrease, and marginal revenue falls below price. Marginal revenue can even become negative if the price drop causes total revenue to decrease.

Graphical Representation

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

• The marginal revenue curve lies below the demand curve for all quantities except the first unit.

Practice: Monopoly Revenue Concepts

Conceptual Questions

Consider the following statements about monopoly revenue:

• a) A monopolist's demand curve is more elastic than the market demand curve. (Incorrect: The monopolist faces the market demand curve, so their demand curve is not more elastic.)

• b) For a monopoly, an increase in the quantity sold will always increase total revenue. (Incorrect: Total revenue may decrease if marginal revenue is negative.)

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

• d) A monopoly’s marginal revenue is less than its average revenue. (Correct: For a monopolist, $MR < AR$ for all units except the first.)

Summary Table: Monopoly vs. Perfect Competition

Feature	Monopoly	Perfect Competition
Demand Curve	Downward sloping (market demand)	Horizontal (perfectly elastic)
Marginal Revenue	Less than price ($MR < P$)	Equal to price ($MR = P$)
Barriers to Entry	High	None

Additional info:

• Monopolists maximize profit where $MR = MC$ (marginal cost).

• In monopoly, increasing output beyond a certain point can decrease total revenue due to the negative marginal revenue.