Understanding the Basics
When discussing the relationship between total revenue (TR) and marginal revenue (MR) under a monopoly, it’s crucial to first grasp the fundamental concepts of each. Total revenue is the total amount of money a firm earns from selling its products, while marginal revenue is the additional revenue a firm receives from selling one more unit of its product.
Monopoly Market Structure
In a monopoly, there is a single seller of a product with no close substitutes. This gives the monopolist significant control over the market, allowing them to set prices and output levels. Unlike in a perfectly competitive market, where price is determined by the intersection of supply and demand, a monopolist faces a downward-sloping demand curve, meaning they must lower the price to sell more units.
The Demand Curve and Marginal Revenue
The demand curve for a monopolist is downward-sloping, indicating that as the price decreases, the quantity demanded increases. This is because consumers are more willing to purchase a product at a lower price. Since the monopolist must lower the price to sell more units, marginal revenue is always less than the price of the product. This can be illustrated in a table:
| Price | Quantity Sold | Marginal Revenue |
|---|---|---|
| $10 | 100 | $10 |
| $9 | 110 | $8 |
| $8 | 120 | $7 |
| $7 | 130 | $6 |
As you can see, the marginal revenue decreases as the quantity sold increases. This is because the monopolist must lower the price to sell more units, resulting in a smaller increase in total revenue for each additional unit sold.
The Relationship Between TR and MR
The relationship between total revenue and marginal revenue is a critical aspect of understanding a monopolist’s pricing and production decisions. When marginal revenue is greater than total revenue, total revenue is increasing. Conversely, when marginal revenue is less than total revenue, total revenue is decreasing. This relationship can be observed in the following table:
| Quantity Sold | Price | Total Revenue | Marginal Revenue |
|---|---|---|---|
| 1 | $10 | $10 | $10 |
| 2 | $9 | $18 | $8 |
| 3 | $8 | $24 | $6 |
| 4 | $7 | $28 | $4 |
In this table, you can see that as the quantity sold increases, total revenue increases, but at a decreasing rate. This is because the marginal revenue is decreasing. When marginal revenue is greater than total revenue, the firm is still gaining additional revenue from selling more units, but at a slower pace. When marginal revenue is less than total revenue, the firm is losing revenue from selling more units.
Optimal Pricing and Output
The relationship between total revenue and marginal revenue is essential for determining the optimal pricing and output levels for a monopolist. A monopolist will continue to increase production and lower prices until marginal revenue equals marginal cost (MC). This is because, at this point, the firm is maximizing its profit. If marginal revenue is greater than marginal cost, the firm can increase profit by producing more. If marginal revenue is less than marginal cost, the firm can increase profit by producing less.
In conclusion, the relationship between total revenue and marginal revenue is a complex and important aspect of understanding a monopolist’s pricing and production decisions. By analyzing this relationship,
