Where is total revenue maximized

If, instead, we charge a lower price on all the units that we sell , we would sell Q 2. So when we think about increasing the quantity sold by one unit, marginal revenue is affected in two ways. First, we sell one additional unit at the new market price. Second, all the previous units, which could have been sold at the higher price, now sell for less. Because of the lower price on all units sold, the marginal revenue of selling a unit is less than the price of that unit—and the marginal revenue curve is below the demand curve.

Tip : For a straight-line demand curve, MR and demand have the same vertical intercept. As output increases, marginal revenue decreases twice as fast as demand, so that the horizontal intercept of MR is halfway to the horizontal intercept of demand. You can see this in the Figure 6. Most people criticize monopolies because they charge too high a price, but what economists object to is that monopolies do not supply enough output to be allocatively efficient.

To understand why a monopoly is inefficient, it is useful to compare it with the benchmark model of perfect competition. Allocative efficiency is a social concept. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost.

Following this rule assures allocative efficiency. But in the case of monopoly, price is always greater than marginal cost at the profit-maximizing level of output, as can be seen by looking back at Figure 4. Thus, consumers will suffer from a monopoly because a lower quantity will be sold in the market, at a higher price, than would have been the case in a perfectly competitive market.

The problem of inefficiency for monopolies often runs even deeper than these issues, and also involves incentives for efficiency over longer periods of time. There are counterbalancing incentives here. On one side, firms may strive for new inventions and new intellectual property because they want to become monopolies and earn high profits—at least for a few years until the competition catches up. In this way, monopolies may come to exist because of competitive pressures on firms. However, once a barrier to entry is in place, a monopoly that does not need to fear competition can just produce the same old products in the same old way—while still ringing up a healthy rate of profit.

He meant that monopolies may bank their profits and slack off on trying to please their customers. The old joke was that you could have any color phone you wanted, as long as it was black. An explosion of innovation followed. Services like call waiting, caller ID, three-way calling, voice mail though the phone company, mobile phones, and wireless connections to the Internet all became available. A wide range of payment plans was offered, as well. It was no longer true that all phones were black; instead, phones came in a wide variety of shapes and colors.

The end of the telephone monopoly brought lower prices, a greater quantity of services, and also a wave of innovation aimed at attracting and pleasing customers. In the opening case, the East India Company and the Confederate States were presented as a monopoly or near monopoly provider of a good.

Regarding the cotton industry, we also know Great Britain remained neutral during the Civil War, taking neither side during the conflict. Did the monopoly nature of these business have unintended and historical consequences? Might the American Revolution have been deterred, if the East India Company had sailed the tea-bearing ships back to England? Of course, it is not possible to definitively answer these questions; after all we cannot roll back the clock and try a different scenario.

We can, however, consider the monopoly nature of these businesses and the roles they played and hypothesize about what might have occurred under different circumstances. Perhaps if there had been legal free tea trade, the colonists would have seen things differently; there was smuggled Dutch tea in the colonial market.

If the colonists had been able to freely purchase Dutch tea, they would have paid lower prices and avoided the tax. What about the cotton monopoly? With one in five jobs in Great Britain depending on Southern cotton and the Confederate States nearly the sole provider of that cotton, why did Great Britain remain neutral during the Civil War?

At the beginning of the war, Britain simply drew down massive stores of cotton. These stockpiles lasted until near the end of Why did Britain not recognize the Confederacy at that point? Two reasons: The Emancipation Proclamation and new sources of cotton. Having outlawed slavery throughout the United Kingdom in , it was politically impossible for Great Britain, empty cotton warehouses or not, to recognize, diplomatically, the Confederate States.

In addition, during the two years it took to draw down the stockpiles, Britain expanded cotton imports from India, Egypt, and Brazil. Monopoly sellers often see no threats to their superior marketplace position. In these examples did the power of the monopoly blind the decision makers to other possibilities?

But, as they say, the rest is history. A monopolist is not a price taker, because when it decides what quantity to produce, it also determines the market price. For a monopolist, total revenue is relatively low at low quantities of output, because not much is being sold. Total revenue is also relatively low at very high quantities of output, because a very high quantity will sell only at a low price.

Thus, total revenue for a monopolist will start low, rise, and then decline. The marginal revenue for a monopolist from selling additional units will decline. Each additional unit sold by a monopolist will push down the overall market price, and as more units are sold, this lower price applies to more and more units.

If that price is above average cost, the monopolist earns positive profits. Monopolists are not productively efficient, because they do not produce at the minimum of the average cost curve. As a result, monopolists produce less, at a higher average cost, and charge a higher price than would a combination of firms in a perfectly competitive industry. Monopolists also may lack incentives for innovation, because they need not fear entry.

Aboukhadijeh, Feross. Accessed July 7, British Parliament. Dattel, E. Accessed July Grogan, David. Accessed March 12, Massachusetts Historical Society. Pelegrin, William.

Skip to content Chapter 9. Learning Objectives By the end of this section, you will be able to:. Explain the perceived demand curve for a perfect competitor and a monopoly Analyze a demand curve for a monopoly and determine the output that maximizes profit and revenue Calculate marginal revenue and marginal cost Explain allocative efficiency as it pertains to the efficiency of a monopoly.

What defines the market? Suppose BC Ferries is considering an increase in ferry fares. If doing so results in an increase in revenues raised, which of the following could be the value of the own-price elasticity of demand for ferry rides? Use the demand diagram below to answer this question. Which of the following statements correctly describes own-price elasticity of demand, for this particular demand curve? Demand is unit elastic for all prices.

Which of the following could be the absolute value for the own-price elasticity of demand, in the price range considered? Skip to content Topic 4 Part 1: Elasticity. Learning Objectives By the end of this section, you will be able to: Analyze graphs in order to classify elasticity as constant unitary, infinite, or zero Describe the price effect and the quantity effect Analyze how price elasticities impact revenue and expenditure. Glossary Elastic when the elasticity is greater than one, indicating that a 1 percent increase in price will result in a more than 1 percent increase in quantity; this indicates a high responsiveness to price.

Inelastic when the elasticity is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in quantity; this indicates a low responsiveness to price. Unitary elastic when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied.

Exercises 4. At what point is demand unit-elastic? Consider the demand curve drawn below. At which of the following prices and quantities is revenue maximized? Previous: 4. The fixed cost Fixed Cost Fixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon.

It is the type of cost which is not dependent on the business activity. Rent, Admin Expense, etc can be fully utilized. Benefits of high qty sold can be availed which helps in increasing profitability Profitability Profitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs.

It aids investors in analyzing the company's performance. To make it simple, Revenue Maximization is a point at which a business keeps selling till marginal revenue does not fall negative and profit maximization is a point at which business sells to point at which its marginal cost does not increase its marginal revenue. This has been a guide to what is revenue maximization. Here we discuss examples and benefits of revenue maximization along with its differences with profit maximization.

You may learn more about financing from the following articles-. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Free Investment Banking Course. Login details for this Free course will be emailed to you. Forgot Password? Article by Madhuri Thakur. What is Revenue Maximization? Explanation Each business start-up has a vision of maximizing the wealth of shareholders.