APE 32.2 Interactive

Marginal Revenue for an Imperfect Competitor

Marginal Revenue Pulls Average Revenue Toward It

Marginal revenue and price are not the same thing, but price and average revenue are the same concept with most applications of demand. With some control over price and output, imperfectly competitive firms realize that the additional revenue garnered from selling extra output changes at a different rate than the price of the good. Average revenue, defined as total revenue / output, falls as the price-searching firm increases output. Marginal revenue, defined as Δtotal revenue / Δoutput, falls even faster than average revenue as output increases.

Assuming the monopoly firm charges every buyer the same price, marginal revenue falls approximately twice as fast as price when the business offers additional units into the product market.

Look at the market-demand schedule BELOW.
Buyer interest begins at a price of \$13.50 when no units are demanded. With a \$1.50 drop in price to \$12.00, 100 units are demanded. Total revenue is \$1,200 at the \$12.00 price per unit; marginal revenue matches price on the first sales block of 100 units. When price falls to \$10.50 per unit, no person pays a price below \$10.50, yet marginal revenue is \$9.00. What causes this result?

This monopoly firm, knowing that the market demand schedule is also the firm’s demand schedule, recognizes that selling more units of product requires the same price for all buyers. It gives up the original price of \$12.00 per unit and adopts \$10.50. Total sales are 200 at a price of \$10.50 per unit, yet the firm had to lower the price \$1.50 on the first block of 100 units to generate the additional
block of 100 units.

Thinking on the margin, the monopolist recognizes that lower prices for the first sales block caused the surrender of \$150 in revenue on the first 100 demanded to gain the next sales block of 100 units. So the \$1,050 gain in revenue from the last 100 sales requires a \$150 deduction in revenue from the first sales block of 100 units. The last sales block, of an additional 100 units, brings \$900 net revenue, all blocks considered.