Intro to Imperfect Competition- Micro Topic 4.1 (Part 1 of 2)
Summary
TLDRThis video script delves into the microeconomic concept of why marginal revenue is less than the demand curve for imperfectly competitive firms, specifically monopolies. It explains how a monopolist, as a price maker, must lower the price for each additional unit sold, affecting total revenue and marginal revenue differently. The script uses a step-by-step example to illustrate how marginal revenue decreases as more units are sold at lower prices, ultimately plotting these values to show the divergence from the demand curve. The goal is to clarify this complex economic principle in an accessible manner.
Takeaways
- 📈 Marginal revenue is less than the demand curve for all imperfectly competitive firms, unlike in perfect competition where price equals marginal revenue.
- 💡 Monopolies, as price makers, must lower the price to sell additional units, which affects the marginal revenue calculation.
- 🔑 The concept of marginal revenue is crucial for understanding the pricing strategies of firms in imperfect competition.
- 🛒 When a monopoly sells an additional unit, it must lower the price for all units, not just the new one, impacting total revenue and marginal revenue.
- 📉 Marginal revenue is the increase in total revenue due to selling one more unit, which is often less than the price of the unit due to price reduction.
- 💰 The first unit sold at a higher price sets the demand curve, but subsequent units sold at lower prices affect the marginal revenue.
- 📊 The marginal revenue curve is derived from plotting the increase in total revenue for each additional unit sold.
- 🤔 Understanding the difference between demand and marginal revenue is essential for grasping economic concepts related to imperfect competition.
- 📚 The script uses a step-by-step example to illustrate how marginal revenue decreases as more units are sold at lower prices.
- 📉 The marginal revenue curve is below the demand curve for a monopolist, reflecting the loss in revenue from having to lower prices for all units sold.
- 🎓 The concept is challenging and requires careful consideration, as it differs from the principles of perfect competition.
Q & A
What is the main concept discussed in the video script?
-The main concept discussed in the video script is the difference between marginal revenue and the demand curve for imperfectly competitive firms, particularly in the context of a monopoly.
Why is marginal revenue less than the demand curve for a monopoly?
-Marginal revenue is less than the demand curve for a monopoly because, to sell additional units, the firm must lower the price for all units sold, not just the additional unit, which results in a decrease in total revenue from the previous units sold.
What is the relationship between price and marginal revenue in perfect competition?
-In perfect competition, the price and marginal revenue are equal to each other because firms are price takers and cannot influence the market price.
Why does a monopoly need to lower the price to sell additional units?
-A monopoly needs to lower the price to sell additional units because it is a price maker and faces a downward-sloping demand curve; it cannot sell more units without reducing the price for all units.
What is the concept of price discrimination, and why can't a monopoly use it in this context?
-Price discrimination is the practice of charging different prices to different customers for the same product. A monopoly cannot use price discrimination in this context because it cannot charge one person a higher price and another a lower price without the first person getting upset, as they would all be paying the same price.
How does the marginal revenue change when a monopoly sells an additional unit?
-The marginal revenue changes by the difference in total revenue before and after selling the additional unit. It is not simply the price at which the additional unit is sold because the price reduction affects all units sold.
What is the significance of the marginal revenue curve being below the demand curve for a monopoly?
-The significance of the marginal revenue curve being below the demand curve for a monopoly is that it illustrates the loss in revenue from having to lower the price for all units to sell an additional one, which is a key aspect of monopoly pricing strategy.
How does the script use the example of selling units at different prices to explain marginal revenue?
-The script uses the example of a monopoly selling units at decreasing prices (e.g., $10, $9, $8, $7) to explain how marginal revenue decreases with each additional unit sold, as the total revenue increase is less than the price of the additional unit due to the price reduction for all units.
What is the role of total revenue in calculating marginal revenue?
-Total revenue is the starting point for calculating marginal revenue. Marginal revenue is the change in total revenue that results from selling an additional unit of the product.
Why is it important for a firm to understand the concept of marginal revenue?
-It is important for a firm to understand the concept of marginal revenue because it helps in making decisions about production levels and pricing strategies, especially for firms that can influence market prices, like monopolies.
How can the concept of marginal revenue be visualized in a graph?
-The concept of marginal revenue can be visualized in a graph by plotting the change in total revenue against the quantity of units sold. The graph will show marginal revenue values below the demand curve, indicating the loss in revenue from price reductions for additional units sold.
Outlines
📈 Understanding Marginal Revenue in Monopoly Markets
This paragraph introduces a complex microeconomic concept: why marginal revenue is less than the demand curve for all imperfectly competitive firms, specifically monopolies. The speaker clarifies that in perfect competition, price and marginal revenue are equal, but in the case of a monopoly, selling an additional unit requires lowering the price for all units, not just the new one. This results in marginal revenue being less than the price of the good because the firm loses the potential higher price on the previous units sold. The explanation uses a step-by-step example of a monopoly deciding to sell more units at progressively lower prices, demonstrating how marginal revenue is calculated and differs from the demand price.
Mindmap
Keywords
💡Microeconomics
💡Marginal Revenue
💡Demand Curve
💡Imperfectly Competitive Firms
💡Monopoly
💡Price Discrimination
💡Total Revenue
💡Price Maker
💡Quantity Demanded
💡Perfect Competition
💡Price Elasticity of Demand
Highlights
Marginal revenue is less than the demand curve for all imperfectly competitive firms.
In perfect competition, price and marginal revenue are equal, but this is not the case in imperfect competition.
Monopolies, as price makers, set prices and face a trade-off between price and quantity sold.
When a monopoly sells an additional unit, they must lower the price for all units, affecting marginal revenue.
The marginal revenue for the first unit equals the demand price, but this changes as more units are sold.
For the second unit, the marginal revenue is less than the demand price due to the price reduction for all units.
The marginal revenue for the third unit is further reduced as the price is lowered again for all units.
The fourth unit's marginal revenue is significantly lower than the demand price, illustrating the diminishing returns.
The concept of marginal revenue is crucial for understanding how monopolies operate and set prices.
Price discrimination is not possible in this scenario, as it would lead to customer dissatisfaction.
The marginal revenue curve is derived from the incremental changes in total revenue as more units are sold.
The demand curve and marginal revenue curve diverge in the case of monopolies, unlike in perfect competition.
The graph plotted shows the relationship between the demand price and marginal revenue for each unit sold.
Each additional unit sold requires a price reduction, impacting the marginal revenue negatively.
The marginal revenue for each unit sold is calculated by the change in total revenue, not just the price of the unit.
The concept of marginal revenue is essential for understanding the pricing strategies of imperfectly competitive firms.
The final unit sold illustrates the continued reduction in marginal revenue as the price is lowered for all units.
Transcripts
hey how you doing this mr. forum with
ac/dc econ key economic concepts in 90
seconds we need a little bit more time
today and the reason why is we're going
to cover a hard concept the concept
that's huge in microeconomics the
question is this why is marginal revenue
less than the demand curve for all
imperfectly competitive firms your
teacher I talked about perfect
competition they told you about the
price and the marginal revenue equal to
each other demand and the marginal
revenue equal each other and all of a
sudden now we're saying the marginal
revenue is not equal to demand alright
for this firm for a monopoly which
doesn't make sense if you think about it
if I sell another unit for $7.00
shouldn't the additional revenue i
generate be $7 well it doesn't and
here's the concept I'm a twenty you in
90 seconds take a look over here let's
make sure we got this monopoly wants to
set a price right because there a price
maker let's say this enterprise 11 no
one buys quantity is zero total revenue
zero they want to sell one they've gotta
lower the price so let's say they go
ahead and lower the price they sell this
unit for ten dollars so they selling it
for ten dollars
one person buys 10 times one the total
revenue is ten dollars marginal revenue
the change is total revenue so I went up
by ten okay that's easy wait so the
price is the marginal revenue demand
equals the Mars revenue but hold on a
second let's sell another unit monopoly
needs a sell another unit in this
situation they have to lower the price
to get someone else to someone right so
I've Nobel Prize download tonight but
they can't price discriminate they can't
charge one person ten dollars and
somebody else nine dollars or else the
first person one get angry right so
they're not telling the first unit
anymore they're selling it for nine nine
is the price nine times two because
they're selling two units is 18 hey look
at the marginal revenue and increase by
eight how is it eight I sold a unit for
nine how was it eight well the reason
why I sold it for nine but I lost a
dollar on that unit that would have sold
at a higher price but I had to lower it
down to nine let's do it again one more
time take a look I want to sell another
unit I want to sell it for eight dollars
because no one else is going to buy it
if I don't lower the price I'll lower
the price down eight but I have
do it for all units when I own the price
eight dollars of the price times three
that's 24 the marginal revenue is not
eight take a look the marginal revenue
increase by six the marginal revenue six
but that's the concept and now done time
for a bonus round if that makes sense
awesome to me it's not that easy if that
just if you get that perfect let me show
you this a few more rounds make sure you
understand the concept here we go good
now I want to sell another unit wasn't
it not only going to do two so no unit
they got a lower the price if they lower
the price they got all the price of all
the units including the ones that would
have sold at a higher price so take a
look at this next one now they're gonna
sell four units I'm going to sell these
four units at seven dollars apiece
seven dollars $7 $7.99 the demand people
want to pay seven dollars for the fourth
unit but the marginal revenue is not
seven dollars it's only four dollars and
that's how I got this graph this graph
is those numbers plotted take a look
it's for this first unit people are
willing to pay $10 right that's the
demand the marginal revenue equals to it
all right that makes sense for the
second unit people want to pay nine
dollars $9.99 a dollar for the product I
would have sold at a higher price so
it's right there it's eight for the
third unit people willing able to pay it
says right there don't want to pay eight
dollars but the marginal rep is only six
for this next one for the fourth unit
people want to pay seven dollars but the
marginal revenue is only four if that
makes sense I want you to finish this
last one off okay I want to sell another
unit I'm gonna knobbly what all I got to
do well I got to lower my price and
final over my price good I'm going to
get a marginal revenue I want you to
please put the numbers that go here here
here here and right there I'll go ahead
and pause for reading and go you pause
okay what goes here well I'm going to
lower my price down to six
all right when I do that $6 times you
can see 5 is 30 that gives my total
revenue my total revenue increased by
only 2 I sold another unit for 6 but my
marginal revenue isn't 6 it's 2 because
I lose dollars on all the previous units
going to the sold at a higher price
that's a concept you're going to need it
for a perfect competition until next
time
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