why MR curve - Marginal Revenue in Monopoly is going downward and why it is steeper than D - Demand curve?
I don`t want to be wrong but MR goes down due the Diminishing Returns Law. It is steeper than D curve beacuse there will always be more demand (than supply) in a Monopoly. THey will cut production at a point where MR=MC and charge what the Demand is willing to pay for it.
Exactly. If I remember correctly, under perfect competition, equilibrium is when MC=MB (AD curve).
The Demand (Dd) curve is downward sloping because you have to charge a cheaper price per unit § if you want to sell more and more quantity (Q) of your good. The Marginal Revenue (MR) curve is downward sloping because the additional revenue you get from selling one more unit of your good falls as quantity rises. So, yes, it is subject to diminishing returns. Think of it this way, if I sell 5 monkeys for $10 each then I make a total of $50 in revenue. Now, if I want to sell you 6 monkeys, I will need to drop the price to say $9 per monkey, to make a total of $54 in revenue. The MR in moving from 5 monkeys at $10 to 6 monkeys at $9 is an additional $4. I.e. the MR is $4. Now, say I want to sell you 7 monkeys; I might need to drop the price per monkey to $8. This will get me a total of $56 in revenue. The MR is now only $2. We can repeat this process a few more times – I sell you 8 monkeys at $7, for total revenue of $56, so MR is $0. Finally, I sell you 9 monkeys at $6, which gives me 54, this time MR is actually negative at -2. MR has fallen sharply and can even become negative. The Demand for monkeys falls as prices rice but will not become negative. Monopolies distort perfect equilibrium because they under supply and over charge. This is because the Monopoly is able to set its own price. The monopoly sets a profit maximising price where MC = MR. I.e. where the additional cost of producing an extra unit is exactly equal to the additional revenue they would gain. If they produced less than this amount, it would be possible to make more profit by selling more units because additional revenue would be more than additional cost. If they produced more than MC=MR, they would make a loss on each additional unit sold. Now, with perfect competition, no firm has control over price and they are price takers. Each firm has to charge a price where Dd = Ss. The perfectly competitive firms can only charge one price the additional revenue they get from selling an extra unit is the same no matter how many units they sell. As a result the MR curve is the same as the demand curve they face. So perfectly competitive firms profit maximise at MC = MR, but their MR is actually their Dd curve. To show that monopolies always restrict supply and over charge, draw the monopoly diagram and mark the Monopoly’s profit maximising price and quantity (MC=MR). On the same diagram, mark the price and quantity where MC = Dd curve. This second set of points is what a perfectly competitive firm (with the same MC as the monopoly) would produce and charge. Notice how it is a cheaper price and a greater quantity than the monopoly. Perhaps a rather long answer to a relatively simple question but I hope it helps!