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Determination of Prices

Monopolist’s Revenue Curve

In a monopolist market, the single selling firm is the sole/ dominant producer or supplier of a particular product. Therefore, the demand curve of such a firm is identical to the market demand curve for the product. In this article, we will look at a monopolist’s revenue curve.

Browse more Topics under Determination Of Prices

  • Intro to Determination of Prices
  • Changes in Demand
  • Changes in Supply
  • Simultaneous changes in Demand and Supply
  • Features of Perfect Competition
  • Price Determination under Perfect Competition
  • Long Run Equilibrium of Competitive Firm and Industry
  • Monopoly Market
  • Price Discrimination
  • Monopolistic Competition
  • Oligopoly
  • Kinked Demand Curve

Monopolist’s Revenue Curve

The market demand curve exhibits the total quantity of a particular product that buyers are willing to buy at a specific price. This also helps the monopolist assess the quantity that he can sell at every price that he sets.

Therefore, if we assume that a monopolist sets a single price and supplies to all the buyers who want to purchase at that price, then we can find his average and marginal revenues with relative ease.

monopolist

The straight line shown in the figure above is the market demand curve for a particular product. The monopolist firm selling the product faces a downward slope, as seen above. This is because the firm will have to reduce the price of the product if it wants to sell more.

The table below lists some selected values of price and quantity from this demand curve. It also computes the amounts of average, total and marginal revenue corresponding to these levels.

Quantity sold Average revenue

(AR = P)

Total revenue

(TR)

Marginal revenue

(MR)

0 10.00 0
1 9.50 9.50 9.50
2 9.00 18.00 8.50
3 8.50 25.50 7.50
4 8.00 32.00 6.50
5 7.50 37.50 5.50
6 7.00 42.00 4.50
7 6.50 45.50 3.50
8 6.00 48.00 2.50
9 5.50 49.50 1.50
10 5.00 50.00 0.50
11 4.50 49.50 (-)0.50

Observations from the table

Since he charges a single price for all the units he sells, the average revenue per unit is identical to the price. Therefore, the market demand curve = the average revenue curve for the monopolist. In a perfect competition, the marginal and average revenues are identical.

However, in the case of a monopoly, this is not true since a monopolist must reduce the price of his product to achieve higher sales. Here are some observations from the table above

  • The monopolist cannot sell any unit for Rs. 10.
  • If he wants to sell 10 units, then the price cannot be higher than Rs. 5 per unit.

Let’s say that the seller wants to sell 3 units. To do so, he must reduce the price from Rs. 9 to Rs.8.50. However, in order to sell the third unit, he has to reduce the price of all three units to Rs. 8.50. Therefore, he receives Rs. 0.50 less on the first 2 units which he could have sold at Rs. 9. Hence, the marginal revenue over the interval from 2 to 3 units is Rs. 7.50 only(instead of Rs. 8.50).

Observe that the marginal revenue is less than the price because the monopolist reduces the price to sell more. This relationship between the marginal and average revenue of a monopoly firm is stated as follows:

  • AR and MR are both negative sloped (downward sloping) curves.
  • MR curve lies half-way between the AR curve and the Y-axis. i.e. it cuts the horizontal line between the Y-axis and AR into two equal parts.
  • AR cannot be zero, but MR can be zero or even negative.

Solved Question on Monopolist’s Revenue Curve

Q: Why does a monopolist face a downward sloping demand curve?

  1. The marginal and average revenue curves are identical.
  2. He has to reduce the price to increase sales.
  3. The price is lower than the marginal revenue.
  4. All of the above.

Answer: In a monopoly, the marginal and average revenue curves are NOT identical. Hence, option a is incorrect. Further, the price is higher than the marginal revenue. Therefore, option c is incorrect. Since a monopolist is the single supplier of a particular product, he has to reduce the price to increase sales. This leads to a downward sloping demand curve. Hence, the correct answer is option b.

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