Market Demand Curve in AR Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

in order to construct a model of a
monopolist you know just like we did for
perfect competition one of the first
things we have to address is exactly
where does marginal revenue marginal
cost equal one another that would be the
profit maximizing output level in the
first type of monopolies we're gonna
explore in this case is a patent
monopoly now a patent monopoly you know
simply produces a product and if we
assume that product has some sort of
assembly line process to it then the
marginal cost curve is is is going to
have the same sort of characteristic
that that that upward sloping but but
you shaped at early stages of output
that a perfectly competitive firm has
and and if it has that you shaped
marginal cost curve it's gonna have the
standard average cost curves as well so
we already know what that model looks
like okay what that cost model looks
like then for a patent monopolist what
we don't know however is what the
marginal revenue function looks like now
if we remember under perfect competition
the marginal revenue curve was
horizontal and that is because perfectly
competitive firms of producing
homogeneous products and they're all
small relative to the industry size okay
meaning that in order for a perfectly
competitive firm to sell more product
all it had to do was increase its level
of output it was so small relative to
the size of the rest of the industry
that the market could easily absorb
farmer Bob producing an extra 500
bushels of corn
the market had no issues absorbing that
that increase in corn production at the
going market price but there's a unique
characteristic about a monopoly and
that's the fact that it is the only firm
in the industry what does that mean that
means in the marketplace that demand
curve that we all know and love is the
market demand curve is exactly the
demand curve that the patent monopolist
or any monopolist faces okay in other
words unlike under perfect competition
where the demand curve reflected a
perfect elasticity and a perfect
substitutability of the product line and
and therefore equated with marginal
revenue and the price of the product the
demand facing a monopolist is the market
demand for that product okay now what
this means with regard to marginal
revenue is that a monopolist can't just
produce more product and make more money
in order for it can produce more product
but in order for it to sell more product
it has to lower the price level in order
to do so because it's facing a downward
sloping demand curve okay so the law of
demand says that if this firm wants to
sell more product it wants to increase
quantity demanded it's gonna have to
lower the price in order to do so now
what does that mean that means that the
marginal revenue curve must also be
downward sloping okay that question is
then what does the marginal revenue
curve specifically look like well it
will remember marginal revenue is the
change in total revenue with the
production and sale of one extra unit
okay so firm sells an extra unit of a
product how much money how much
additional money does it put into its
cash register from the sale of that
product okay now we have to remember
that when a firm sells a product it
doesn't sell the first unit at one price
then sell the second unit at another
price then sell the third unit at
another price if it wants to sell three
units it has to lower the price of all
three units okay so by definition then
the marginal revenue curve must not must
also not must also be downward sloping
but it has to lie below the demand curve
somewhere okay so exactly where does the
marginal revenue curve lie below the
demand curve
well if marginal revenues change in
total revenue from the production and
sale of one extra unit we know where
where total revenue is maximized okay
total revenue is maximized at the
midpoint of the demand curve
remember this above that demand was
elastic okay and below that demand was
inelastic okay
at that point total revenue is maximized
okay so at that price level of the
product and at that quantity sold total
revenue P times Q couldn't be any larger
you raise the price total revenue goes
down you lower the price total revenue
goes down it is maximized at that point
the book because of you raised the price
total revenue Falls or if you lower the
price total revenue Falls it must be the
case then that at that midpoint quantity
level marginal revenue is zero now if we
imagine that the first unit sold the
marginal revenue would necessarily equal
the marginal benefit of the product then
it must be the case that the marginal
revenue curve is downward-sloping lies
below the demand curve and crosses the
horizontal axis
excuse me crosses the whole
horizontal axes at the midpoint of the
demand curve okay how do I know that
because again if prices are above the
midpoint price level if I lower the
price guess what I gain revenue okay if
if I'm priced at the midpoint level and
I lower my price guess what I lose
revenue okay how can I show that well
assume that I'm priced up here okay and
I'm selling Q prime units of the product
and I'm priced at P Prime
well if I lower the price to P double
prime okay we already know that I should
pick up revenue how do I know I'm
picking up revenue gaining revenue
because marginal revenue is positive at
that point in other words I am adding
the total revenue by that amount right
there okay below this level assume I'm
priced you know exactly at the midpoint
price level okay so we'll call this P
prime here and assume I lower the price
to P double prime okay now I know that I
should be losing revenue my revenue
should be shrinking from the discussion
we just had how do I know that because
at that price level my marginal revenue
is negative in other words my total
revenue has shrunk by that much there
okay make a long story short a
monopolist faces a downward sloping
demand curve that means that marginal
revenue must also be downward sloping
the fact that a monopolist in order for
a monopolist to sell more product they
have to lower the price of their product
but not just of that next unit they sell
but of all the units they sell means
then that not only is marginal revenue
downward sloping like the
and it has to lie below the demand curve
question then is okay we're below the
demand curve does it lie well it must
lie in such a fashion that it crosses
the horizontal axis at the midpoint of
the demand curve because that's where
marginal revenue is zero okay
lowering prices at Q's related to price
levels to the left of that midpoint
necessarily means I'm increasing revenue
beyond that point I'm decreasing revenue
because marginal revenue is negative