Monopolist Business Decisions

Revenue Calculation

• Total Revenue (TR): Price (P) x Quantity (Q).
• Average Revenue (AR): Total Revenue divided by Quantity.
  • AR is always equal to the price in monopoly.
• Perfect Competition vs Monopoly:
  • In perfect competition, price remains constant for all quantities.
  • In monopoly, the price decreases as quantity increases due to a downward-sloping demand curve.

Demand Curve

• The demand curve in monopoly is the same as the average revenue curve.
• As Q increases, both P and AR decrease.

Marginal Revenue (MR)

• Definition: Change in Total Revenue over Change in Quantity.
• Difference from AR:
  • MR is less than AR and not equal to price in monopoly.
• Effects on MR:
  • Output Effect: Selling more quantity increases revenue.
  • Price Effect: To sell more, price is reduced, affecting revenue.
  • These effects combine to determine MR.

Example Calculation

• Example prices: $10, $8, $6.
• Example quantities: 2, 3, 4.
• Calculating Total Revenue:
  • $10 x 2 = $20
  • $8 x 3 = $24
  • $6 x 4 = $24
• Calculating Marginal Revenue:
  • From 2 to 3 units: Increase in TR by 4.
  • From 3 to 4 units: Increase in TR by 0.
• Impact: MR decreases faster than price as quantity increases.

Monopolist Pricing

• Monopolists cannot charge different prices for different units.
• Example:
  • Selling third unit at $8 means all units are sold at that price.
  • Revenue from additional unit is offset by loss from lowering price of previous units.

Graphical Representation

• MR Curve: Always below the demand curve in monopoly.
• Falls faster due to output and price effects.

Profit Maximization

• Objective: Equate MR and Marginal Cost (MC) to maximize profit.
• Steps:
  1. Set MC = MR.
  2. Use demand curve to set price.
  3. Determine profit using average total cost curve.
• Comparison with Perfect Competition:
  • Perfect competition: Price = MC = MR.
  • Monopoly: Price > MC resulting in market power.

Key Takeaways

• Monopolists have market power due to their ability to set prices above MC.
• They maximize profit by carefully balancing output and pricing decisions.
• Unlike perfectly competitive firms, monopolists adjust prices to sell additional output.