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Monopolist’s Revenue Curves

Since the monopolist firm is assumed to be the only producer of a particular product, its demand curve also shows the quantity that the monopolist will be able to sell.
 
Example

XYZ company is the single producer of a product, it faces the entire market demand and hence the downwards sloping demand curve. i.e., in order to increase the sales, a firm is reducing its price.

 

It can be better understood through the following table:
 

Quantity

Price=AR

Total Revenue

Marginal Revenue

0

11

0

0

1

10

10

10

2

9

18

8

3

8

24

6

4

7

28

4

5

6

30

2

6

5

30

0

7

4

28

-2

8

3

24

-4

  • In order to increase the sales, a firm is reducing its price. Hence AR falls.
  • ƒAs a result of fall in price, total revenue increases but at a diminishing rate.
  • ƒTotal Revenue will be higher when Marginal revenue is zero.
  • ƒTotal Revenue falls when Marginal revenue becomes negative
  • ƒAverage Revenue and Marginal Revenue both declines but fall in Marginal revenue is greater than fall in Average Revenue.
  • ƒThe Average Revenue curve of the firm and the demand curve of the buyer is one and same. It slopes downwards from left to right indicating that the seller can sell larger quantities only at reduced prices.
  • ƒThe Marginal Revenue curve is similar to that of Average Revenue curve. But Marginal revenue is less than Average Revenue. It lies below the Average Revenue curve, that is half way between Average revenue curve and the Y axis. i.e., it cuts the horizontal line between Y axis and AR into two equal parts.
  • ƒAverage Revenue cannot be zero but Marginal Revenue can be zero or even negative.
  • If the seller wishes to charge ₹ 11, he cann’t sell any unit alternatively, if he wishes to sell 7 units, his price cann’t be higher than ₹ 4.
Description: 20627.png
 
Description: 20640.png 
 
In a straight line demand curve, we know that the elasticity of the middle point is equal to one. If follows that Marginal revenue corresponding to the middle point of the demand curve (AR curve) will be zero.
 
Thus,
 
If e = 1, Total revenue is maximum and MR = 0
 
If e < 1, Total revenue is falling and MR is negative
 
This may be depicted in a better way, thorough a diagram:
 
Description: 21267.png
 
A profit maximizing monopolist will never choose to sell output for which demand is relatively inelastic because his total revenue will fall and marginal revenue will be negative. It will not be profitable for him to produce beyond the midpoint on the demand curve.




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