A mathematical connection between average revenue and marginal revenue of average revenue occurs for a firm selling an output in a monopoly market. The monopolist's total revenue is TR(y) = yP(y), so its marginal revenue function is Thus the relation between MR and P is like that shown in the following figure. (Notice that average revenue is just P(y); we refer to P alternatively as AR.). For a monopoly average revenue is greater than marginal revenue. The relation between average revenue and quantity of output produced depends on.
Marginal revenue for a monopolist
Marginal Less Than Average Monopoly Marginal revenue falling short of average revenue occurs for a firm selling an output in a monopoly market. This exhibit contains the average revenue curve and marginal revenue curve for medicine sold another hypothetical firm, Feet-First Pharmaceutical. By virtue of a government patent, Feet-First Pharmaceutical is the only producer of Amblathan-Plus, the only cure for the deadly but hypothetical foot ailment known as amblathanitis.
As the only producer, Feet-First is a monopoly with extensive market control, and it faces a negatively-sloped demand curve. The primary observation from this exhibit is that the negatively-sloped marginal revenue curve lies below the negatively-sloped average revenue curve. The juxtaposition of these two curves illustrates the marginal less than average relation. Because the marginal revenue is less than average revenue, the average revenue curve decreases.
Because Feet-First Pharmaceutical has market control and faces a negatively-sloped factor demand curve it must charge a lower price to sell more Amblathan-Plus.
What Is the Relationship Between the Monopolist's Demand Curve and the Marignal Revenue Curve?
Suppose, for example, that Feet-First Pharmaceutical wants to increase the quantity of Amblathan-Plus sold from 4 to 5 ounces. However, the lower price is charged to all buyers. What happens to Feet-First Pharmaceutical's total revenue when it lowers the price? Two forces are at work: Marginal revenue is the net result of both.
For a monopolist, this is the same as the demand curve.
Relationship between AR and MR Curves
Average revenue for a monopolist consists of the price per unit, because a monopolist captures the entire market at a given level of output. The monopolist must decrease prices if it wants to sell any more of its goods, because at any level of prices it has already sold to every customer willing to buy.
The only new customers in the market who have not bought the product are those farther down the demand curve, who only buy when the price is lower. Marginal Revenue The marginal revenue of a company is the revenue of its last unit sold. For a monopolist, this is always decreasing -- producing more units means producing at a lower price, and therefore making more units leads to less marginal revenue due to that reduced price.
The marginal revenue curve for a monopolist is always located below its demand curve.
Under monopolistic competition, the relationship between AR and MR is the same as under monopoly. But there is an exception that the AR curve is more elastic, as shown in Figure 6. The firm can increase its sales by a reduction in its price.
The average and marginal revenue curves do not have a smooth downward slope under oligopoly. Since the number of sellers under oligopoly is small, the effect of a price cut or price increase on the part of one seller will be followed by some changes in the behaviour of other firms.
If a seller raises the price of his product, the other sellers will not follow him in order to earn larger profits at the old price. So the price-raising seller will experience a fall in the demand for his product. On the other hand, if the oligopolistic seller reduces the price of his product, his rivals also follow him in reducing the prices of their products so that he is not able to increase his sales.
The corresponding MR curve falls vertically from a to b and then slopes at a lower level.