Imperfect Competition

Pure
Monopoly
Price Quantity Total Change in Marginal
(Average Demanded Revenue Total Revenue Revenue
Revenue) (Q) (R) (ΔR) (ΔR / ΔQ)

$13.50 0 $0
12.00 100 1,200 $1,200 $12.00
10.50 200 2,100 900 9.00
9.00 300 2,700
7.50 400
6.00 500 3,000 0 0
4.50 600 2,700 -300 -3.00
Price Quantity Total Change in Marginal
(Average Demanded Revenue Total Revenue Revenue
Revenue) (Q) (R) (ΔR) (ΔR / ΔQ)

$13.50 0 $0
12.00 100 1,200 $1,200 $12.00
10.50 200 2,100 900 9.00
9.00 300 2,700 600 6.00
7.50 400 3,000 300 3.00
6.00 500 3,000 0 0
4.50 600 2,700 -300 -3.00
 The Price changes at each
point by $1.50
But the marginal revenue changes
at each point by
$3.00!
Marginal revenue decreases more
quickly than average revenue
Will the monopolist ever operate
on the inelastic portion of the
demand curve?
No, the monopolist will never operate
on the inelastic portion of the demand
curve, because Total Revenue will
decline as Price declines beyond the
mid-point of the demand curve.
Remember the Arc method of elasticity
of demand!
Even though marginal revenue is
declining, total revenue is
increasing, up to the mid-point

Beyond the mid-point,

marginal revenue is
negative, and total revenue
begins to decline
 $12
Quick review: In the elastic
portion of the curve, a change in
11
price results in a bigger percent
10 change in quantity demanded
9

6
Costs / Revenue

5 D (AR)
4

-1

-2
MR
-3
100 200 300 400 500 600
Quantity
 Like the competitive firm, the
monopolist will maximize profit at
the point of output
where marginal cost equals
marginal revenue
The MC = MR rule
Quantity Total Marginal Average Total Marginal Average
of Cost Cost Total Revenue Revenue Revenue
Output Cost (Price

0 $0 - $0 $0 - $0

1 900 $900 900 1,200 $1,200 1,200

2 1,600 700 800 2,100 900 1,050

3 2,100 700 2,700 900

4 2,400 3,000 300

5 3,000 600 3,000

6 4,200 1,200 2,700 -300

Quantity Total Marginal Average Total Marginal Average
of Cost Cost Total Revenue Revenue Revenue
Output Cost (Price

0 $0 - $0 $0 - $0

1 900 $900 900 1,200 $1,200 1,200

2 1,600 700 800 2,100 900 1,050

3 2,100 500 700 2,700 600 900

4 2,400 300 600 3,000 300 750

5 3,000 600 600 3,000 0 600

6 4,200 1,200 700 2,700 -300 450

 But,
because the marginal revenue
curve is below the demand curve,
The price at the output level
where MC = MR is higher
than for a firm in a
competitive market, or
P > MC not P = MC
 $1,200
MC
1,100

1,000

900

800
P=$750
700 ATC
Profit
600
Costs / Revenue

500 D (AR)
400

300 MC=MR
200

100

-100

-200
MR
-300
1 2 3 4 5 6
Quantity of Output
• A profit maximizing monopolist would
produce an output of 4 units.

• At this level of output, MC is $300 per unit

and MR is $300 per unit.

• At this level of output, ATC is $600 per unit

and AR (price) is $750 per unit.

• This gives the monopolist an economic

profit of $150 per unit for a total economic
profit of $600 ($150 x 4)
 So,
The monopolist is inefficient.
The marginal cost of the firm is equal to
demand (allocative efficiency) at a price of
$600 and output of 5 units.

But the monopolist charges a higher price

and produces less
($750)(4 units)
than a firm operating in an efficient
competitive market
 $1,200
MC
1,100

1,000

900

800 Deadweight loss

700 ATC

600
Costs / Revenue

500 D (AR)
400

300 MC=MR
200

100

-100

-200
MR
-300
1 2 3 4 5 6
Quantity of Output