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M07.L02 — The Monopolist's Demand and Marginal Revenue

Module: Module 07 — Monopoly Lesson: L02 of 06 Duration: ~30 minutes Level: Introductory Provenance: OpenStax Principles of Microeconomics 3e | MIT OCW 14.01 Principles of Microeconomics

Learning Objective

Explain why marginal revenue is less than price for a monopolist.

The Monopolist's Demand Curve

Unlike perfect competitors who face perfectly elastic demand, a monopolist faces the downward-sloping market demand curve. This means:

  • To sell more units, the monopolist must lower price on all units
  • Price (P) > Marginal Revenue (MR) for all quantities
  • The MR curve lies below the demand curve

For a linear demand curve P = a - bQ: - MR = a - 2bQ (twice the slope) - MR becomes negative when demand is inelastic (|PED| < 1)

Worked Example

Calculating MR from a Demand Schedule

Given Australian electricity prices: | Quantity (GWh) | Price ($/MWh) | Total Revenue | Marginal Revenue | |----------------|---------------|---------------|------------------| | 100 | 80 | 8,000 | - | | 200 | 70 | 14,000 | 60 | | 300 | 60 | 18,000 | 40 |

  1. Observe price must fall from $80 to $70 to sell 200 vs 100 units
  2. Calculate TR = P × Q at each quantity
  3. MR = ΔTR/ΔQ = (14,000-8,000)/(200-100) = $60
  4. Note MR (\(60) < P (\)70) at Q=200

Common Misconception

"Monopolists can charge any price they want"

While monopolists have pricing power, they are constrained by market demand. Setting price too high results in fewer sales. Profit maximization occurs where MR = MC, not at the highest possible price.

Key Takeaways

  • Monopolists face downward-sloping demand
  • MR < P because price cuts apply to all units
  • MR curve has twice the slope of linear demand
  • MR is negative in the inelastic portion of demand
  • Monopolists never produce where demand is inelastic

Practice

  1. Why does MR fall faster than price?
  2. At Q=300 in our example, what would MR be if price fell to $50?
  3. Why wouldn't a monopolist operate where MR is negative?

Further Resources

Provenance: OpenStax Principles of Microeconomics 3e | MIT OCW 14.01 Principles of Microeconomics