ECON1131 Lecture Notes - Lecture 25: Marginal Revenue, Economic Surplus, Natural Monopoly
Document Summary
The optimal output rule the profit maximizing level of output for the monopolist is at mr = mc, shown by point a, where the mc and mr curves cross. Look for the point where the marginal revenue curve crosses the marginal cost curve. It is important not to fall into a common error: imagining that the point also shows the price at which the monopolist sells it output. Monopolists don"t have a supply curve that shows the quantity that producers are willing to supply for any given market price. A monopolist does not take the price as given it chooses a profit maximizing quantity, taking into account its own ability to influence the price. If price elasticity of demand < 1 then when a monopolist increases output, it will decreases revenue meaning the marginal revenue will be negative. The monopolist can increase revenue by producing more only if the price elasticity of demand > 1.
