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Why is the marginal revenue for a monopoly lower than its price?

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rogerarnold | Student, Undergraduate | eNoter

Posted November 28, 2009 at 12:05 PM via web

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Why is the marginal revenue for a monopoly lower than its price?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted November 28, 2009 at 12:09 PM (Answer #1)

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In a monopoly, the marginal revenue is lower than the price because the demand curve is downward sloping.  When prices go down, more units of the product are bought.

Because of this, marginal revenue will not always equal price (and will never equal price in the textbooks).

Think about this example:

You charge $150 and sell 0.  So you drop your price.  Then you charge $138 and sell 1.  You drop the price even lower -- to $125 and you sell 2.  Your marginal revenue for the second unit sold was $112 even though the price was $125.

So, the reason is because, unlike in perfect competition, the demand curve is downward sloping.

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krishna-agrawala | College Teacher | Valedictorian

Posted November 28, 2009 at 5:59 PM (Answer #2)

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The question assumes that marginal revenue is always less than the unit price. This is not true. As a matter of fact it is nor right to even compare the two as the two refer to quite different things. It is like comparing speed with distance.

Please note that price is specified as money or dollars per unit of product, just as speed is expressed as distance per unit of time. In comparison revenue, including marginal revenue, is measured in terms of just money or dollars, just as distance is specified in some unit of distance such as meters.

Further, please note that for the same change in price, the marginal revenue can be positive, negative or zero depending upon price elasticity of demand. The marginal revenue increases with increasing elasticity of demand. With elasticity of less than 1 the marginal revenue is negative, and with elasticity more than 1 the marginal revenue is positive, and keeps on increasing with increasing elasticity. When elasticity is zero, the marginal revenue is also zero.

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