To sell a larger output, a monopoly must set a lower price.
Total revenue = Price x Quantity
Marginal revenue is the change in total revenue resulting from one-unit increases in the quantity sold.
For a single-price monopoly, marginal revenue is less than price at each level of output, or MR < P.
Marginal Revenue and Elasticity
A single-price monopoly’s marginal revenue is related to the elasticity of a good’s demand: if a demand is elastic, a fall in
price results into an increase in total revenue.
The increase in revenue from the greater quantity sold outweighs the decrease in revenue from the lower price per unit,
and MR is positive. As the price falls, total revenue increases.
If demand is inelastic, a fall in price brings a decrease in total revenue.
Rise in revenue from the increase in quantity sold is outweighed by the fall in revenue from the lower price per unit, and
MR is negative.
As price falls, total revenue decreases.
A fall in price does not change total revenue – the rise in revenue from the greater quantity sold equals the fall in revenue
from the lower price per unit, and MR = 0.
Total revenue is maximized when MR = 0.
In Monopoly, Demand is Always Elastic
Single-price monopoly never produces an output where there is inelastic demand.
It it did produce this output, firms could increase total revenue, decrease total cost, and increase economic profit by
Price and Output Decision
The monopoly faces the same types of technology constraints as the competitive firm, but the monopoly faces a different
The monopoly selects the profit-maximizing quantity in the same manner as a competitive firm, where MR = MC.
Monopoly set its price at the highest level at which it can sell the profit-maximizing quantity.
Monopoly might make an economic profit (even in the long run) because barriers to entry protect the firm from competitor
firms. However, a monopoly that incurs an economic loss might shut down temporarily in the short run or exit the market
in the long run.