Intro to Imperfect Competition- Micro Topic 4.1 (Part 1 of 2)

Summary

This 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

00:00

📈 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.

Keywords

💡Microeconomics

Microeconomics is the branch of economics that studies the behavior of individual consumers and firms in making decisions about the allocation of scarce resources. In the video, microeconomics is central to understanding why marginal revenue is less than the demand curve for imperfectly competitive firms. The script discusses how firms, especially monopolies, set prices and how this affects their marginal revenue.

💡Marginal Revenue

Marginal revenue is the additional revenue generated from selling one more unit of a product. It is a key concept in the video as it is shown to be different from the demand curve in imperfectly competitive markets. The script uses examples to illustrate how marginal revenue decreases as more units are sold, which is contrary to what might be expected in a perfectly competitive market.

💡Demand Curve

The demand curve represents the relationship between the price of a good and the quantity that consumers are willing to buy at that price. In the video, the demand curve is contrasted with the marginal revenue curve, showing that for imperfectly competitive firms, marginal revenue is less than the price at which goods are sold.

💡Imperfectly Competitive Firms

Imperfectly competitive firms are those that do not have perfect control over the market price due to the presence of other firms or lack of price discrimination. The video script discusses how these firms, unlike perfectly competitive firms, have a marginal revenue that is less than the price they charge, which is a critical point in understanding their pricing strategies.

💡Monopoly

A monopoly is a market structure where there is only one seller of a product or service. The video script uses the example of a monopoly to explain how marginal revenue differs from the demand curve. Monopolies, as price makers, must lower their prices to sell additional units, which affects their marginal revenue.

💡Price Discrimination

Price discrimination is the practice of charging different customers different prices for the same product. The script mentions that monopolies cannot engage in price discrimination, which means they must lower the price for all units sold when they want to sell more, affecting their marginal revenue.

💡Total Revenue

Total revenue is the total amount of money a firm receives from selling its products. In the video, total revenue is used to calculate marginal revenue. The script explains that as more units are sold, the total revenue increases, but the marginal revenue (the increase in total revenue from selling one more unit) decreases.

💡Price Maker

A price maker is a firm that has the ability to set the price of a product or service in the market. The video script refers to monopolies as price makers, emphasizing that they can influence the market price and thus have a different marginal revenue curve compared to firms in perfectly competitive markets.

💡Quantity Demanded

Quantity demanded is the amount of a product that consumers are willing and able to buy at a given price. The video script uses the concept of quantity demanded to explain how the demand curve is related to marginal revenue, especially in the context of imperfect competition.

💡Perfect Competition

Perfect competition is a market structure where many firms sell identical products and have no control over the market price. The video script contrasts this with imperfect competition, noting that in perfect competition, price equals marginal revenue, unlike in the case of monopolies or other imperfectly competitive firms.

💡Price Elasticity of Demand

Price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. While not explicitly mentioned in the script, the concept is implied when discussing how lowering prices to sell more units affects marginal revenue, which is a key aspect of understanding demand elasticity in the context of imperfect competition.

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