<< Chapter < Page Chapter >> Page >

To calculate total revenue for a monopolist, start with the demand curve perceived by the monopolist. [link] shows quantities along the demand curve and the price at each quantity demanded, and then calculates total revenue by multiplying price times quantity at each level of output. (In this example, the output is given as 1, 2, 3, 4, and so on, for the sake of simplicity. If you prefer a dash of greater realism, you can imagine that these output levels and the corresponding prices are measured per 1,000 or 10,000 pills.) As the figure illustrates, total revenue for a monopolist rises, flattens out, and then falls. In this example, total revenue is highest at a quantity of 6 or 7.

Clearly, the total revenue for a monopolist is not a straight upward-sloping line, in the way that total revenue was for a perfectly competitive firm. The different total revenue pattern for a monopolist occurs because the quantity that a monopolist chooses to produce affects the market price, which was not true for a perfectly competitive firm. If the monopolist charges a very high price, then quantity demanded drops, and so total revenue is very low. If the monopolist charges a very low price, then, even if quantity demanded is very high, total revenue will not add up to much. At some intermediate level, total revenue will be highest.

However, the monopolist is not seeking to maximize revenue, but instead to earn the highest possible profit. Profits are calculated in the final row of the table. In the HealthPill example in [link] , the highest profit will occur at the quantity where total revenue is the farthest above total cost. Of the choices given in the table, the highest profits occur at an output of 4, where profit is 800.

Marginal revenue and marginal cost for a monopolist

In the real world, a monopolist often does not have enough information to analyze its entire total revenues or total costs curves; after all, the firm does not know exactly what would happen if it were to alter production dramatically. But a monopolist often has fairly reliable information about how changing output by small or moderate amounts will affect its marginal revenues and marginal costs, because it has had experience with such changes over time and because modest changes are easier to extrapolate from current experience. A monopolist can use information on marginal revenue    and marginal cost    to seek out the profit-maximizing combination of quantity and price.

The first four columns of [link] use the numbers on total cost from the HealthPill example in the previous exhibit and calculate marginal cost and average cost. This monopoly faces a typical upward-sloping marginal cost curve, as shown in [link] . The second four columns of [link] use the total revenue information from the previous exhibit and calculate marginal revenue.

Notice that marginal revenue is zero at a quantity of 7, and turns negative at quantities higher than 7. It may seem counterintuitive that marginal revenue could ever be zero or negative: after all, does an increase in quantity sold not always mean more revenue? For a perfect competitor, each additional unit sold brought a positive marginal revenue, because marginal revenue was equal to the given market price. But a monopolist can sell a larger quantity and see a decline in total revenue . When a monopolist increases sales by one unit, it gains some marginal revenue from selling that extra unit, but also loses some marginal revenue because every other unit must now be sold at a lower price. As the quantity sold becomes higher, the drop in price affects a greater quantity of sales, eventually causing a situation where more sales cause marginal revenue to be negative.

Questions & Answers

what is the meaning of Dumping
Stephen Reply
what is cost
Deepon Reply
Cost is the amount of capital spent on purchasing an item. Or the amount of expenditure incurred in producing a product or rendering service.
describe the features of micro economics with suitable example
Purusoth Reply
what is economics
According to Mankiw it is the management of scarce resources.
so what should a nation do to minimize scarcity?
Andrew Reply
is there any difference between firm and industry under monopoly
Dipsikha Reply
I think firms come together to form industry
There is a well known saying in economics that "there is no such thing as a free lunch". Discuss. Guys any answer
Economic,choice,scarcity,opportunity cost
Seyram Reply
How to we read in hindi
marshellian demand curve?
Mohsin Reply
Economics is the study of how societies, government, businesses, household and individuals allocate their scarce resources
What is economy
mwas Reply
who was the father of micro economics
Rayappa Reply
Adam Smith
adam Smith
adam smith
adam smith
Adam Smith
ppc stands for what?
Deng Reply
Production Possibility Curve.
Product possibility boundaries
Tony Reply
what is the difference between equilibrium and quantity demanded
Usama Reply
equilibrium is the point at which demand and supply are equal while quanitity demanded is d quanitity of commodity that people are willing to buy at a particular price
Thanks Olayinka
what's elasticity
What is a product possibility boundary describing the labour and capital
it is responsiness good and service
what is mean deamond
Shanu Reply

Get the best Microeconomics course in your pocket!

Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Microeconomics' conversation and receive update notifications?