Monopolist being the sole supplier, does not have to face the given horizontal price line (AR curve) as in the case of competition. He can fix up the price by himself. But, if he fixes the price, he has to leave the amount sold at this price to the will of the buyers; the market demand at this given price can be high or low according to the would like to willingness to buy. On the other hand, he can fix up the amount which he would like to sell and let the price be determined by the market demand. However, under no conditions he can do charged and the quantity to be sold by him.
Total Revenue, Average Revenue and Marginal Revenue
| Price Per Unit $ |
Quantity Sold (Units) |
Total Revenue (TR) $ |
Average Revenue (AR) $ |
Marginal Revenue (MR) $ |
| 1 | 2 | 3 | 4 | 5 |
| 30 25 20 15 10 5 0 |
0 10 20 30 40 50 60 |
0 250 400 450 400 225 0 |
30 25 20 15 10 5 0 |
- 250/10 = 25 150/10 = 15 50/10 = 5 -50/10 = -5 -175/10 = 17.5 -225/10 = 22.5 |
Under monopoly, since there is only one seller in the market, the distinction between the firm and industry ceases to exist. The same production unit is the firm, and being the only firm producing a particular commodity, it also constitutes the industry. In other words it is one big firm, which is dominating the market. Now, if this firm increase the supply, the market price is likely to fall. This is because people purchase more only when the price is lower. The monopolist thus faces a negatively sloping market demand curve. The monopoly firm can fix the price at which it has to leave the quantity produced to be determined by the market. Or, it can fix the quantity to be produced and let the price be determined by the market. There is thus a trade – off. Monopolist can increase sales only if price but suffers reductions in its sale. Under such conditions the total revenue would rise less than proportionately to the increase in the units sold.
It can be seen that average revenue is falling when sale of output increases. Since the increase in total revenue is less than proportionate to the increase in the sale, when total revenue is divided by the number of units sold, resulting of the average revenue is bound to be lower. In the same way, marginal revenue also becomes smaller and smaller as the sale of output increases. The fall in the case of mariginal revenue is bigger than the corresponding fall in the average revenue. Therefore, the marginal revenue curve (MR) lies below the average revenue curve.
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