In perfect competition, the marginal revenue is equal to the Marginal benefit (which is the demand curve). I do not understand why the marginal revenue should be different from marginal benefit in other cases such as monopoly. If you have Schweser material, I am referring to Figure 1 in page 88 in the book #2 (Economics). My rationale is (may be wrong) that the price I am willing to pay for my next unit (marginal benefit) is the seller’s increase in revenue by selling his next item (marginal revenue). So I thought MB = MR in all the scenarios. Could somebody explain why MR is less than an MB for a monopoly? Thanks kochunni
in perfect competition MB = MR is true, but in monopoly it is not, because Consumer Surplus exists, which means that some consumers would pay more than the price charged by monopoly (inefficiency), so the monopoly is not fully using the price elasticity of demand. This can be done be price discrimination. A percfect price discrimination situation would be when the monopoly knows the price eleasticy of demand of a single buyer, and charges that buyer exacly the same price he/she want to pay for it, no more, no less. In this situation MR = MB in monopoly.
kochunni, Your question’s answer is on page 181 of Volume 2.(CFAI Book) sylwester, Consumer surplus and producer surplus exist both in perfect competition and in monopoly. The sum of them is maximized in perfect competition. They shrink in monopoly since deadweight loss exists. So, resources are not used efficiently.
I also struggled with this concept…Here are a few points that helped me get a better understanding of how MB <> MR in some instances: Remembering that MB = Demand: 1. In perfect competition, a company’s MR/MB curve is perfectly elastic (horizontal) and the MR/MB curve for the market is downward sloping. Alternatively, in a monopolistic environment, a single firm (the monopoly) faces a downward sloping MR/MB curve since it is the only player in that market. Therefore, in perfect competition, the price of a product cannot be influenced by an individual firm, rather, the price is determined by market equilibrium where MR/MB = MC. If market demand or supply shifts causing a change in the price, then the horizontal MR/MB curve that an individual firm faces will shift up or down along with the new equilibrium. If this change in price causes the firm to produce at a level that makes less than 0 economic profit, then the firm will leave the market since they are not able to increase price. On the other hand, monopolies DO have the ability to change the price of a product, and in order to maximize economic profit, they usually do (unless, of course, there are restrictions to doing so). Instead of a new price being created from a shift in the market supply or demand, a monopoly will simply impose a new price and the amount produced will either shift up or down the demand curve. The MC of producing this new quantity is found at the new quantity on the MC curve which now creates a gap between MR, MB, and MC. This gap is the deadweight loss referred to by minocfa. I hope this clears a few things up. Best, TheChad
Thanks everybody. Thanks Chad! I agree with you. When the demand curve is downward slopping, the producers lower the price to sell more units to increase his profits. That’s why marginal revenue is less than the marginal price. But in a perfect competition, the demand curve is horizontal. so MR = MB = Price.