Why Is the Marginal Revenue Curve Below the Demand Curve in a Monopoly? | promovare-site.info
Nov 11, Here is how to calculate the marginal revenue and demand curves and represent them graphically. The ultimate source of power in a market, even a monopolistic market, is the consumer, Marginal revenue is related to the price elasticity of demand — the. The relationship between marginal revenue and price in a monopolistic market is best understood by considering a numerical example, such as the one.
Monopolist optimizing price: Marginal revenue
If you offer a product or service that no one else has, then you possess a monopoly. In time, competitors probably will aim to match or improve upon your innovation, and your monopoly position will be removed. But while you are in a position as a market leader, it's important to understand how your monopoly determines your demand curve and why your marginal revenue curve will always be lower than your demand curve.
Demand Curve The law of demand, a fundamental principle of economics, says that as the price of something goes up, the demand for it declines. Conversely, as the price falls, demand goes up.
Plotted on a graph, this forms what's called the demand curve. The vertical axis of the graph is the price charged for an item; the horizontal axis is the quantity sold.
The typical demand curve slopes downward from the upper left, where a high price means low demand, to the lower right, where a low price creates high demand. Every good or service has its own demand curve. Monopoly Situations When you've got a monopoly on something, you have no direct competition. You can set any price you want, and the demand curve for your good or service tells you how much you'll sell.
The first thing I want to do is essentially find the slope, the slope right over here. The best way to find the slope right over here is say how much does my total revenue change if I have a very small change in quantity? If I have a very small change in quantity, how much does my total revenue change? Let me think about it this way. The other ones I will be able to approximate a little bit easier.
Let's think of it this way. If my quantity is 0, my total revenue is 0. If I increase my quantity very, very, very, very little, so let's just make it 0. We could think about it in terms of this curve right over here, or we could just use this expression, which we derived from price times quantity, and we will get, I'll get my calculator out, if our quantity is.
Let me turn the calculator on. Total revenue is going to be. That's going to be our total revenue. It's going to be 0.
Now we can figure out or get a pretty good approximation for that marginal revenue right at that point.
What Is the Relationship Between the Monopolist's Demand Curve and the Marignal Revenue Curve?
Our change in quantity is. That's our change in quantity, and our change in revenue is 0. We just have to divide. If you try it with even smaller numbers, if you tried this with.
Monopolist optimizing price: Marginal revenue (video) | Khan Academy
The closer that you get, the smaller your change in, and this is what you essentially do in calculus. You try to find a super small change right over here. This is essentially going to be 6. Our marginal revenue at this point is essentially going to be 6. What I want to do is I'm going to plot marginal revenue here on our demand curve as well or on this axis where we've already plotted our demand curve.
When our quantity is 0, our marginal revenue, if we just barely increase quantity, the incremental total revenue we get is going to be 6. I'll just plot it. I'll just plot it right over there.
The marginal benefit in the market is 6, right at that point. Now let's think about the slope at these other points. These, I'm going to approximate.
I could do it this way, but I'll just approximate it. I'll just approximate it by using other points. If I want to find the slope right over here, when our quantity is equal to 1, the slope would look like, the slope would look like that.
I'm going to approximate it by finding the slope between these two points. I am going to approximate it, and actually, it's going to be a very good approximation. I'll do it later with calculus to show that it is a very good approximation. But I'm going to approximate it by the slope between these two points.
Between those two points, our change in quantity is 2, and our change in total revenue is 8.