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Mike Fladlien
Muscatine High School
Monopoly
Demand Curve
Assumptions:
1. Single
producer
2. Unique
Produce
3. Barriers to
entry
4. Price Maker
5. P = AR = D
6. No close
subs for the
product
Demand
Curve
Price = AR = D
Total Revenue
Total Revenue
equals Price time
Quantity.
In this case Total
Revenue equals $8
times 1.
Decrease the Price by $1The firm is selling Greebies for $8, the maximum Price. Why would the firm lower the price?
Assume that the marginal cost is $0. The firm would lower the price because total revenue would increase.
How much would total revenue increase?
To make this calculation you must consider the price effect and the quantity effect.
Price Effect and Quantity Effect
The effect that a change of $1 had on total revenue was 12.5%. The effect that selling an additional unit had on total revenue was 100%. The price effect is shown in “red” and the quantity effect is shown in “green”. The firm gave up one unit but gained 7 units for a net increase in total revenue of 6 units. What happened to total revenue? TR increased from $8 to $14. The amount of the change is $6 or what economists call “marginal revenue”.
Concept
Review
What is the price elasticity of demand between $8 and $7 and the quantities 1 and 2? (Use the absolute value of the answer.)
Decrease the Price by $1The firm is selling Greebies for $8, the maximum Price. Why would the firm lower the price?
Assume that the marginal cost is $0. The firm would lower the price because total revenue would increase.
How much would total revenue increase?
Total revenue increases by $4.
Marginal Revenue
Marginal revenue is the change in total revenue divided by the change in price.
What do you notice about the relationship between price and marginal revenue?
What is the price elasticity of demand between the quantity of 6 and 7?
When marginal revenue equals “zero” what conclusion can you make about total revenue?
What elasticity is used to describe the change in total revenue between the quantity of 4 and 5?
Sequence of Price and Quantity Effects
As you lower the price, the
price effect becomes more
dominate and the quantity
effect becomes less
dominate.
Sequence of Price and Quantity
Effects
As you lower the
price, the price
effect becomes
more dominate and
the quantity effect
becomes less
dominate.
Sequence of Price and Quantity
Effects
As you lower the price,
the price effect
becomes more
dominate and the
quantity effect
becomes less
dominate.
Sequence of Price and Quantity
Effects
As you lower the price,
the price effect
becomes more
dominate and the
quantity effect becomes
less dominate.
Total Revenue
What happens to
total revenue as
price is
decreased?
Where is total
revenue maxed?
What is marginal
revenue where
total revenue is
maxed?
What part of the
total revenue
shows that price
is elastic? Unit
elastic?
Inelastic?
Marginal Revenue Curve
Marginal
revenue is the
additional
revenue earned
from the next
unit.
It is always half
of the Demand
curve.
Marginal
revenue is
always less than
price because
the firm has to
lower the price
in order to sell
the next unit.
Pure Monopoly
Profit Max
Where does P = MC?
At the socially Optimal Output, how much is produced?
How does the monopoly output differ from the perfect competition price?
Profit
