Sign In
Try for Free
 flag-us

Mastering Single-Price Monopoly: Demand, Revenue, and Elasticity
Dive into the world of single-price monopoly economics. Understand demand curves, calculate marginal revenue, and explore elasticity's impact on pricing strategies and profit maximization.

Get the most by viewing this topic in your current grade. Pick your course now.

Now Playing:Monopoly single price marginal revenue and elasticity – Example 1a
Intros
  1. Monopoly Single-Price: Marginal Revenue & Elasticity Overview:
  2. Monopoly Single-Price: Marginal Revenue & Elasticity Overview:
    Total Revenue & Demand Curve
    • Total Revenue: p × q
    • Deriving Total Revenue from Demand
    • Total Revenue curve
    • Quadratic function
  3. Monopoly Single-Price: Marginal Revenue & Elasticity Overview:
    Marginal Revenue & Demand Curve
    • Finding Marginal Revenue from Total Revenue
    • Formula to Calculate Marginal Revenue
    • Graphing Marginal Revenue
Examples
  1. Use the following table to:

    Price (p)

    Quantity (q)

    6

    0

    5

    3

    4

    6

    3

    9

    2

    12

    1

    15

    0

    18
    1. Create a table of values for the total revenue curve

    2. Graph the total revenue curve.

Monopoly single-price: marginal revenue & elasticity
Jump to:NotesConceptFAQsPrerequisites
Notes
Total Revenue & Demand Curve


Since there is only one firm in a monopoly, the demand curve for the single firm is the market demand.

Total revenue & demand curve

Using the demand curve, we can calculate the total revenue curve.

Total Revenue: is the price multiplied by the quantity sold.

Total Revenue: price multiplied by quantity sold


Note: The total revenue curve is a quadratic function.

Marginal Revenue & Demand Curve

Using the total revenue, we can also find and graph the marginal revenue curve for single-price monopoly.

To calculate marginal revenue, we use the formula:

MR = △TR△q\large \frac{\triangle TR}{\triangle q}

Marginal revenue curve for single-price monopoly

Plotting the points with the demand curve together gives us the following graph:

Marginal revenue curve for single-price monopoly


Note: The MR curve can also be derived algebraically by multiplying the coefficient of the demand curve by 2.

Elasticity & Marginal Revenue

Marginal revenue is related to the elasticity of demand.

Marginal revenue is related to the elasticity of demand
  1. If demand is elastic, then 1% price cut increases the quantity sold by more than 1%. This causes marginal revenue is positive, and revenue will increase.

    2. Elastic  \, →  \, MR > 0  \, →  \, R  ↑ \, \uparrow \,

  2. If demand is inelastic, then 1% price cut increases the quantity sold by less than 1%. This causes marginal revenue is negative, and revenue will decrease.

    3. Inelastic  \, →  \, MR < 0  \, →  \, R  ↓ \, \downarrow \,

  3. If demand is unit elastic, then 1% price cut increase the quantity sold by 1%. This does not change the revenue. 

    4. Unit Elastic  \, →  \, MR = 0  \, →  \, R unchanged

Note: In a monopoly, the demand will always be elastic. The firm will never produce a huge quantity to sell at a low price. Instead, they would increase their price, and sell less quantities to increase profit.
Concept

Introduction to Single-Price Monopoly: Demand, Revenue, and Elasticity

Single-price monopoly is a crucial concept in economics, where a sole seller controls the market for a product or service. Understanding this model requires grasping key elements such as the monopoly demand curve, total revenue, marginal revenue, and elasticity. The demand curve for a monopoly slopes downward, reflecting the inverse relationship between price and quantity demanded. Total revenue represents the overall income generated from sales, while marginal revenue is the additional revenue from selling one more unit. Elasticity measures how sensitive demand is to price changes, playing a vital role in a monopolist's pricing decisions. These concepts are interconnected, influencing the monopolist's profit-maximizing strategies. The introduction video serves as an essential tool for visualizing these relationships, offering clear explanations and examples. By understanding these fundamental concepts, students can better analyze monopolistic market structures and their economic implications, setting the stage for more advanced topics in microeconomics.

FAQs

Here are some frequently asked questions about single-price monopoly, marginal revenue, and elasticity:

  1. What is the demand curve for a monopoly firm?

    The demand curve for a monopoly firm is downward-sloping, representing the entire market demand. It shows an inverse relationship between price and quantity demanded. Unlike competitive markets, a monopoly faces the market demand curve as its own demand curve.

  2. How is marginal revenue for a monopolist computed?

    Marginal revenue for a monopolist is computed by finding the change in total revenue resulting from selling one additional unit. The formula is MR = TR / Q, where MR is marginal revenue, TR is the change in total revenue, and Q is the change in quantity (usually 1 unit).

  3. Is a monopoly demand curve elastic or inelastic?

    A monopoly demand curve can be both elastic and inelastic, depending on the price level. Generally, the upper portion of the demand curve is elastic, while the lower portion is inelastic. Monopolies typically operate in the elastic portion to maximize profits.

  4. What is the relationship between elasticity and marginal revenue in a monopoly?

    In a monopoly, elasticity and marginal revenue are closely related. When demand is elastic, marginal revenue is positive, and total revenue increases as quantity increases. When demand is inelastic, marginal revenue is negative, and total revenue decreases as quantity increases. At unit elasticity, marginal revenue is zero.

  5. Why do monopolies prefer high prices and low quantities?

    Monopolies prefer high prices and low quantities because this strategy maximizes their profits. By operating in the elastic portion of the demand curve, they can set prices where marginal revenue exceeds marginal cost. This approach allows them to exploit their market power and capture more consumer surplus.

Prerequisites

Understanding the concept of "Monopoly single-price: marginal revenue & elasticity" requires a solid foundation in various economic principles. While there are no specific prerequisite topics provided for this subject, it's crucial to recognize that economics is a field built on interconnected concepts. A comprehensive grasp of fundamental economic theories and principles is essential for fully comprehending the intricacies of monopoly pricing and its relationship to marginal revenue and elasticity.

To effectively analyze monopoly single-price scenarios, students should have a strong understanding of basic microeconomic concepts. These include supply and demand dynamics, market structures, and pricing strategies. Familiarity with these foundational elements allows for a more nuanced appreciation of how monopolies operate and make pricing decisions.

Additionally, a firm grasp of marginal analysis is crucial. This involves understanding how changes in production or sales affect costs and revenues. Marginal revenue, a key component of the topic at hand, is directly related to this concept. Students who have mastered marginal analysis will find it easier to comprehend how monopolies determine their optimal output and pricing levels.

Elasticity, another critical aspect of this topic, builds upon the basic principles of supply and demand. A thorough understanding of price elasticity of demand and its implications for business decisions is essential. This knowledge helps in analyzing how sensitive consumers are to price changes in a monopolistic market and how this affects the monopolist's revenue.

Furthermore, a solid foundation in mathematical concepts, particularly calculus and basic algebra, is beneficial. These mathematical skills are often employed in deriving marginal revenue functions and calculating elasticities, which are integral to understanding the relationship between pricing decisions and revenue in monopoly markets.

While specific prerequisite topics are not listed, it's important to emphasize that economics is a cumulative discipline. Each new concept builds upon previously learned material. Therefore, students approaching the study of monopoly single-price scenarios should ensure they have a strong grasp of basic economic principles, market structures, pricing theories, and relevant mathematical tools.

By solidifying their understanding of these foundational concepts, students will be better equipped to tackle the complexities of monopoly pricing strategies, analyze the interplay between marginal revenue and elasticity, and appreciate the broader implications of these economic phenomena in real-world scenarios.