Why is the Marginal Revenue Curve for a Monopoly Is Below the Demand Curve?
When studying different market structures like perfect competitive markets or monopolies, we need to first start by understanding how they relate to the consumer.
A perfectly competitive firm has no saying in the price as they are price takers. This means that they can sell all that they want at that price. They just don’t have a saying in the price like making it higher.
The Demand curve is also the Marginal Revenue Curve (Price), because when they sell another unit, the Total Revenue is the Quantity x Height of that line(Price = Demand = MR).
A monopoly is different. Here, one firm serves the market. So in order to sell another unit of a product it has to lower its price of the unit being sold.
Let’s look at an example:
From the above table we see that the firm sells 0 products at €12.00, 1 product at €11.00 and so on.
The Total Revenue is P x Q, but here in order to sell more products, they reduce the Price of all the products being sold at that quantity: If they have 2 products to sell they sell these at €10.00, but if they have 4 products to sell they sell these at €8.00
The effect of this is seen in the Marginal Revenue Curve. If on one hand in a perfectly competitive market the Marginal Revenue is the Price, here it is not. It is the Change in Total Revenue (€20.00-€11.00) divided by the Change in Quantity(2-1): (€20.00-€11.00) / (2-1) = €9.00. So the Demand is represented by Total Revenue (TR) or AR(Average Revenue – Same Thing) and the Marginal Revenue is what the firm prices all units being sold at that quantity.
Remember that from 0 to the point where MR intersects the X-Axis, Demand is Elastic, at that point is unit elastic and from that point on to where DARP curve intersects the X-Axis, DEmand is Inelastic for the reasons we have just seen.
I hope this clears this out for you. Remember: the Marginal Revenue in a Monopoly is the Market Price(Demand) at that Quantity minus the Price the Company sets on all products at that same Quantity.
