Google
Thursday 
May 5, 2016 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
Today's Index
Yesterday's Index
221.4

Help us compile the AmosWEB Free Lunch Index. Tell us about your last lunch.

Skipped lunch altogether.
Bought by another.
Ate lunch at home.
Brought lunch from home.
Fast food drive through.
Fast food dine in.
All-you-can eat buffet.
Casual dining with tip.
Fancy upscale with tip.

More About the Index
Too bright?

The sun.
Albert Einstein.
Sheldon Cooper.
Arc welding.
Teeth after whitening.
LED flashlight.

MARKET TRANSACTION: The exchange of goods and services through a market. The set of market transactions taking place in the economy is most important in terms of measuring gross domestic product (GDP). Market transactions provide the basic data used by number crunchers at the Bureau of Economic Analysis to begin the estimation of GDP. However, these number crunchers don't just want to measure market transactions, their goal is to measure economic production. As such, they eliminate some market transactions that do not involve economic production, then add economic production that do not involve market transactions.

Visit the GLOSS*arama


MARGINAL REVENUE CURVE, MONOPOLY:

A curve that graphically represents the relation between the marginal revenue received by a monopoly for selling its output and the quantity of output sold. Because a monopoly is a price maker and faces a negatively-sloped demand curve, its marginal revenue curve is also negatively sloped and lies below its average revenue (and demand) curve. A monopoly maximizes profit by producing the quantity of output found at the intersection of the marginal revenue curve and marginal cost curve.
Monopoly is a market structure with a single firm selling a unique good. As the only firm on the supply-side of the market, monopoly is a price maker and has extensive market control, facing a negatively-sloped demand curve. If a monopoly wants to sell a larger quantity, then it must lower the price.

The marginal revenue curve reflects the degree of market control held by a firm. For a perfectly competitive firm, the marginal revenue curve is a horizontal, or perfectly elastic, line. For a monopoly, oligopoly, or monopolistically competitive firm, the marginal revenue curve is negatively sloped and lies below the average revenue (demand) curve.

Marginal Revenue Curve,
Medicine Style
Marginal Revenue Curve, Monopoly
The marginal revenue curve (MR) for Feet-First Pharmaceutical, a hypothetical firm, is displayed in the exhibit to the right. Key to this curve is that Feet-First Pharmaceutical is a monopoly provider of Amblathan-Plus and thus faces a negatively-sloped demand curve. Larger quantities of output are only possible with lower prices.

The vertical axis measures marginal revenue and the horizontal axis measures the quantity of output (ounces of medicine). Although quantity on this particular graph stops at 12 ounces of medicine, it could go higher.

This exhibit displays both the marginal revenue curve (MR) and the average revenue curve (AR), which is also the demand curve. Both are negatively sloped, but the marginal revenue curve lies below the average revenue curve, which means that marginal revenue is less than average revenue (and price) for any given quantity.

How can this be? Why is this so? An explanation seems in order.

Consider the situation facing the Feet-First Pharmaceutical monopoly. If Feet-First Pharmaceutical sets the Amblathan-Plus price at $8.50, then buyers are willing to purchase 4 ounces. However, if Feet-First Pharmaceutical wants to increase the quantity sold from 4 ounces to 5 ounces, then it MUST lower the price from $8.50 to $8 per ounce as it moves along the demand (average revenue) curve. But here is the catch: Feet-First Pharmaceutical must lower the price for ALL, not just for the fifth ounce.

What happens to Feet-First Pharmaceutical's total revenue when it lowers the price? Two forces are at work: (1) the revenue gained by adding extra ounces and (2) the revenue lost by lowering the price for existing ounces. Marginal revenue is the net result of both.

  • First, by lowering its price, Feet-First Pharmaceutical increases the quantity sold from 4 ounces to 5 ounces. This extra ounce generates an extra $8 of revenue, the price of the sixth ounce. This is $8 of extra revenue that Feet-First Pharmaceutical did NOT have at the higher price. If this is all that happens, then Feet-First Pharmaceutical has a marginal revenue of $8 for the sixth ounce, equal to the price.

  • Second, by lowering its price, Feet-First Pharmaceutical collects less revenue from its other 4 ounces. It would have collected $8.50 per ounce for a total of $34. But with the lower $8 price it collects only $32, a reduction of total revenue by $2, or $0.50 per ounce.
The $8 gained by selling the extra ounce is partially offset by the $2 lost from lowering the price for other ounces. On net, total revenue increases by only $6. The loss of revenue collected on existing ounces is the key reason that marginal revenue is less than price.

Although this marginal revenue curve is based on the production activity of Feet-First Pharmaceutical, a well-known monopoly firm, it applies to any firm with market control. Monopolistic competition and oligopoly firms that also face negatively-sloped demand curves that generate comparable marginal revenue curves.

<= MARGINAL REVENUE CURVE, MONOPOLISTIC COMPETITIONMARGINAL REVENUE CURVE, PERFECT COMPETITION =>


Recommended Citation:

MARGINAL REVENUE CURVE, MONOPOLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2016. [Accessed: May 5, 2016].


Check Out These Related Terms...

     | marginal revenue | marginal revenue, monopoly | marginal revenue curve, perfect competition | marginal revenue curve, monopolistic competition | total revenue curve | average revenue curve | marginal cost curve | marginal product curve | marginal revenue product curve | marginal factor cost curve |


Or For A Little Background...

     | market structures | monopoly | monopoly characteristics | monopoly and demand | perfect competition | oligopoly | monopolistic competition | demand | demand price | law of demand | efficiency |


And For Further Study...

     | short-run production analysis | short-run analysis, monopoly | monopoly and efficiency | breakeven output, monopoly | profit curve, monopoly | short-run production alternatives, monopoly | profit maximization, monopoly |


Related Websites (Will Open in New Window)...

     | U.S. Chamber of Commerce | Better Business Bureau | Small Business Administration |


Search Again?

Back to the WEB*pedia


APLS

State of the ECONOMY

New Orders for Manufactured Durable Goods
November 2015
$238.8 billion U.S. Commerce Dept.
Up 0.1% from Oct. 2015

More Stats

RED AGGRESSERINE
[What's This?]

Today, you are likely to spend a great deal of time lost in your local discount super center trying to buy either a T-shirt commemorating last Friday (you know why) or a rotisserie oven that can also toast bread. Be on the lookout for bottles of barbeque sauce that act TOO innocent.
Your Complete Scope

This isn't me! What am I?

The New York Stock Exchange was established by a group of investors in New York City in 1817 under a buttonwood tree at the end of a little road named Wall Street.
"Each of us is issued but one life, and we know full well how it all ends. It would be regrettable to squander this one chance on someone else's appearance, someone else's experience. "

-- Joseph Brodsky, Writer

AGI
Adjusted Gross Income
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2016 AmosWEB*LLC
Send comments or questions to: WebMaster