In a monopoly, the marginal revenue curve lies below the demand curve due to the following reasons:
Key Facts
- Monopoly Demand Curve: The demand curve for a monopoly is negatively sloped, indicating that the monopolist can sell more output only by lowering the price of the product. As the price falls, the quantity demanded increases, and vice versa.
- Marginal Revenue: Marginal revenue is the change in total revenue associated with selling one more unit of output. For a monopolist, marginal revenue is less than the price.
- Price Reduction: In order to sell additional units, a monopolist must lower the price on all units. This means that the marginal revenue obtained from selling an additional unit is less than the price at which it is sold.
- Marginal Revenue Curve: The marginal revenue curve represents the additional revenue gained from selling one more unit of output. Due to the need to lower prices to sell additional units, the marginal revenue curve lies below the demand curve. This is because marginal revenue is less than the price.
- Marginal Social Benefit vs. Marginal Private Benefit: In monopoly, the demand curve represents the marginal social benefit, while the marginal revenue represents the marginal private benefit. Since the monopolist must lower prices to sell more units, the marginal social benefit is greater than the marginal private benefit.
Monopoly Demand Curve
The demand curve for a monopoly is negatively sloped, indicating an inverse relationship between price and quantity demanded. As the monopolist lowers the price, the quantity demanded increases, and vice versa. This means that the monopolist can sell more output only by reducing the price of the product.
Marginal Revenue
Marginal revenue is the change in total revenue associated with selling one more unit of output. For a monopolist, marginal revenue is less than the price. This is because, in order to sell an additional unit, the monopolist must lower the price on all units.
Price Reduction
To sell additional units, a monopolist must lower the price on all units. This means that the marginal revenue obtained from selling an additional unit is less than the price at which it is sold.
Marginal Revenue Curve
The marginal revenue curve represents the additional revenue gained from selling one more unit of output. Due to the need to lower prices to sell additional units, the marginal revenue curve lies below the demand curve. This is because marginal revenue is less than the price.
Marginal Social Benefit vs. Marginal Private Benefit
In monopoly, the demand curve represents the marginal social benefit, while the marginal revenue represents the marginal private benefit. Since the monopolist must lower prices to sell more units, the marginal social benefit is greater than the marginal private benefit.
Conclusion
The marginal revenue curve lies below the demand curve in a monopoly because the monopolist must lower the price on all units in order to sell additional units. This results in marginal revenue being less than the price, and the marginal revenue curve being below the demand curve.
References
- https://homework.study.com/explanation/why-does-the-marginal-revenue-curve-lie-below-the-demand-curve-explain.html
- https://www3.nd.edu/~cwilber/econ504/504book/outln4b.html
- https://smallbusiness.chron.com/marginal-revenue-curve-below-demand-curve-monopoly-69988.html
FAQs
What is the demand curve for a monopoly?
The demand curve for a monopoly is negatively sloped, indicating that the monopolist can sell more output only by lowering the price of the product. As the price falls, the quantity demanded increases, and vice versa.
What is marginal revenue?
Marginal revenue is the change in total revenue associated with selling one more unit of output. For a monopolist, marginal revenue is less than the price.
Why is marginal revenue less than price for a monopolist?
In order to sell an additional unit, a monopolist must lower the price on all units. This means that the marginal revenue obtained from selling an additional unit is less than the price at which it is sold.
What is the marginal revenue curve?
The marginal revenue curve represents the additional revenue gained from selling one more unit of output. Due to the need to lower prices to sell additional units, the marginal revenue curve lies below the demand curve.
Why does the marginal revenue curve lie below the demand curve for a monopoly?
The marginal revenue curve lies below the demand curve for a monopoly because the monopolist must lower the price on all units in order to sell additional units. This results in marginal revenue being less than the price, and the marginal revenue curve being below the demand curve.
What is the relationship between marginal social benefit and marginal private benefit in a monopoly?
In a monopoly, the demand curve represents the marginal social benefit, while the marginal revenue represents the marginal private benefit. Since the monopolist must lower prices to sell more units, the marginal social benefit is greater than the marginal private benefit.
How does the MR curve affect the profit-maximizing output of a monopolist?
The profit-maximizing output of a monopolist is determined by the point where marginal revenue equals marginal cost. Since the MR curve lies below the demand curve, the profit-maximizing output of a monopolist is lower than the output that would be produced in a competitive market.
What are the implications of the MR curve being below the demand curve for consumers and society?
The MR curve being below the demand curve for a monopoly has implications for consumers and society. Consumers pay a higher price for goods and services than they would in a competitive market, and society experiences a loss of consumer surplus. Additionally, the lower output produced by a monopolist can lead to inefficiencies in the allocation of resources.