<< 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

the art of managing the production, distribution and consumption.
Satangthem Reply
what is economics
Khawar Reply
what is Open Market Operation
Adu Reply
dominating middlemen men activities circumstances
Christy Reply
what Equilibrium price
Adji Reply
what is gap
mirwais
who is good with the indifference curve
Dexter
What is diseconomic
Alixe Reply
what are the types of goods
WARIDI
how can price determination be the central problem of micro economics
simon Reply
marginal cost formula
Nandu Reply
you should differentiate the total cost function in order to get marginal cost function then you can get marginal cost from it
boniphace
What about total cost
Foday
ok
Foday
how can price determination be the central problem if micro economics
simon
formula of cross elasticity of demand
Theresia Reply
what is ceteris paribus
Priyanka Reply
what is ceteris parabus
Priyanka
Ceteris paribus - Literally, "other things being equal"; usually used in economics to indicate that all variables except the ones specified are assumed not to change.
Abdullah
What is broker
scor
land is natural resources that is made by nature
scor
What is broker
scor
what is land
kafui
What is broker
scor
land is natural resources that is made by nature
scor
whats poppina nigga turn it up for a minute get it
amarsyaheed Reply
what is this?
Philo
am from nigeria@ pilo
Frank
am from nigeria@ pilo
Frank
so
owusu
what is production possibility frontier
owusu
it's a summary of opportunity cost depicted on a curve.
okhiria
please help me solve this question with the aid of appropriate diagrams explain how each of the following changes will affect the market price and quantity of bread 1. A
Manuela Reply
please l need past question about economics
Prosper Reply
ok let me know some of the questions please.
Effah
ok am not wit some if den nw buh by tommorow I shall get Dem
adepojurafiu
Hi guys can I get Adam Smith's WEALTH OF NATIONS fo sale?
Ukpen
hello I'm Babaisa alhaji Mustapha. I'm studying Economics in the university of Maiduguri
Babaisa
okay
Humaira
my name is faisal Yahaya. i studied economics at Kaduna state university before proceeding to West African union university benin republic for masters
Faisal
Hi guys..I am from Bangladesh..
Mannan
Wat d meaning of management
igwe Reply
disaster management cycle
Gogul Reply
cooperate social responsibility
igwe
Fedric Wilson Taylor also define management as the act of knowing what to do and seeing that it is done in the best and cheapest way
OLANIYI

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask