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The marginal revenue for a monopolist is the private gain of selling an additional unit of output. The marginal revenue curve is downward sloping and below the demand curve and the additional gain from increasing the quantity sold is lower than the chosen market price.
where marginal revenue equals marginal cost. This is usually called the first order conditions for a profit maximum. [2] A monopolist will set a price and production quantity where MC=MR, such that MR is always below the monopoly price set. A competitive firm's MR is the price it gets for its product, and will have Price=MC. According to Samuelson,
The company is able to collect a price based on the average revenue (AR) curve. The difference between the company's average revenue and average cost, multiplied by the quantity sold (Qs), gives the total profit. A short-run monopolistic competition equilibrium graph has the same properties of a monopoly equilibrium graph.
Thus the total revenue curve for a monopoly is a parabola that begins at the origin and reaches a maximum value then continuously decreases until total revenue is again zero. [31] Total revenue has its maximum value when the slope of the total revenue function is zero. The slope of the total revenue function is marginal revenue.
A firm with market power will set a price and production quantity such that marginal cost equals marginal revenue. A competitive firm's marginal revenue is the price it gets for its product, and so it will equate marginal cost to price. (′ / +) = By definition ′ / is the reciprocal of the price elasticity of demand (or /). Hence
A firm with monopoly power sets a monopoly price that maximizes the monopoly profit. [4] The most profitable price for the monopoly occurs when output level ensures the marginal cost (MC) equals the marginal revenue (MR) associated with the demand curve. [4]
This means that the firm maximizes profit at the intersection of the new marginal cost line (MC' in the diagram) and Marginal Revenue Product line (the additional revenue for selling one more unit). [12] This is the point where it becomes more expensive to produce an additional item than is earned in revenue from selling that item.
Therefore, in uncompetitive market, marginal revenue is less than its price. This allows the firm to set a price which is higher than that which would be found in a similar but more competitive industry, allowing the firms to maintain an economic profit in both the short and long run.