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AP®︎/College Microeconomics
Course: AP®︎/College Microeconomics > Unit 4
Lesson 1: Introduction to imperfect competitionMarginal revenue and marginal cost in imperfect competition
This video discusses the differences in a graph of marginal cost and marginal revenue for an imperfectly competitive firm compared to a perfectly competitive firm.
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1) Do we posit that demand decreases in the imperfectly-competitive market (1:55) because the firm would need a higher price to produce more...which would decrease demand?
More generally, how are the demand-, marginal revenue-, and price curves related here?
2) Is the 'inefficiency' (3:10), multiplied by quantity, the firm's profit?
3) Does the inefficiency (3:10) invite competitors (assuming they can produce a similar-enough product)? I can see this in 2 ways: 1, (if the inefficiency is profit) others may wish to claim some of the profit; 2, the inefficiency reflects an unsupplied demand that another firm could supply while keeping MC </= MR.(6 votes)- I need help
On the graph of imperfect competition, the lines of demand and marginal revenue differs as soon as a little bit unit is sold. But I think at quantity 1, the marginal revenue is the price at quantity 1, as well as demand. So the marginal benefit should move away from demand after 1 unit is produced. That confuses me.
Help is sincerely appreciated(3 votes) - Something doesn't seem to make any sense.
MAYBE It's because in "marginal revenue" comparisons here we are not just comparing the scenario where "one more item" is sold at the market price.
If the market price is $10, then the marginal revenue for every single item sold would be $10. But for some reason we're comparing different scenarios entirely, in this vid and the last, eg the scenario where they are sold for $50 as market price for all, compared with the scenario where they are sold for $10 market price for all. But within each of those scenarios, the "marginal revenue" is not being treated as the revenue for selling "one more item" at the market price AT ALL.
Anyway, the point is this: if the demand curve represents how many would be bought at a specific price,(as suggested eg in2:38onwards) then up until the marginal cost = the "amount that would be bought at a specific price" then there is still profit, and the marginal revenue exceeds the marginal cost.
If selling "one more" at a given price brings in more money than the marginal cost, how can it ever POSSIBLY be the case that the "marginal revenue" is actually BELOW the "marginal cost" as alleged in this video, and building on "types of competition and marginal revenue"?(1 vote)
Marginal revenue is the "revenue from selling one more item," but more specifically it's the "change in total revenue if we sell one more item."
If we sell another item (called I) and Price is still above MC, the cost of producing I will be less than the price we can sell it for; so yes, we would make a profit on I.
BUT, following the downward slope of the demand curve, if we sell I, we would be accepting a lower price, on all of the items we sell. So although we get a profit from selling I, we LOSE REVENUE bc we're selling all our other items at a lower price than before. If the extra profit we get from selling I doesn't outweigh the effect of us losing revenue from having to sell everything else at a lower price, then it wouldn't make sense for us to sell I, even if we could make a profit from I.(3 votes)
- So basically from the pattern that the MR decreases more rapidly than D, imperfectly competitive firms can establish a quantity that eliminates transactions, therefore creating a deadweight loss which does not maximize theoretical social welfare. The MC is the supply curve so by generating goods at where MR = MC you are not having prices where MC would create producer surplus and Demand curve would create consumer surplus.(1 vote)
1:55Video transcript
- [Instructor] In this video,
we're going to think about marginal revenue and marginal cost for a firm in an imperfectly
competitive market. But before we do that, I just
want to be able to review and compare to what we already know about a firm in a perfectly
competitive market. So right over here, we're
analyzing the firm's economics. This shows the marginal cost
as a function of quantity, and we've talked about this before. Oftentimes, it will trend down initially, as you have better specialization
and some efficiencies, and then it might start trending up, as there are just coordination costs or other costs that make
the marginal cost go up. And we have talked about this notion that, in a perfectly competitive market, the firm is a price-taker. There's going to be some market price, let's call this P sub m, some price in the market for the good that they are producing, and there's many producers
who are producing this good. And they're undifferentiated, and there's no barriers to entry. And so they just have to
be price-takers there. No matter how many units they produce, they're just going to be able
to get that same market price. So a firm in a perfectly
competitive market, that market price defines
their marginal revenue curve. Their marginal revenue
curve will essentially just be a horizontal line like this, and we've already studied
this in previous videos. And we talked about that here, if this firm was trying
to maximize its profit and if it was rational, it
would produce the quantity where marginal cost is
equal to marginal revenue. So it would produce this
quantity right over here. But now let's think about how
things are a bit different for a firm in an imperfectly
competitive market. In a previous video, we talked about how, in an imperfectly competitive market, there's some differentiation amongst the various
players who are competing, and so their market price
is a function of quantity. If they just produce a
bunch of their product, the price that they get in the
market is likely to go down. So they will have their own
firm-specific demand curve. Maybe it looks something like this. So that is their demand curve. And we also saw in that
video that that demand curve, essentially the price that
they could get at any quantity, that that's not going to be the same as the marginal revenue curve. If the demand curve is
downward-sloping like that, the marginal revenue curve is likely to be even more downward-sloping. So it's going to look something like this. That would be the marginal revenue curve. Now in this situation, what would be rational for the firm to do? Well, once again, it would
want to produce the quantity where the marginal cost is
equal to the marginal revenue. So they would want to produce
this quantity right over here. But you see something interesting here. If they produce at this quantity, notice the price that
they can get in the market is much higher than that. The price that they get in the market is higher than the marginal cost and the marginal revenue at that point. And because we see a situation where price is greater
than your marginal cost, versus in a perfectly competitive market where you see that price
is equal to marginal cost, that that is the optimal quantity, but because you have this gap, that people are willing to pay
more than that marginal cost. But you still aren't going to
be able to produce any more because it doesn't make sense from a marginal revenue point of view. This gap, the difference between the
price and the marginal cost at this rational quantity for this firm in an imperfectly competitive
market to produce, economists would refer to
this as an inefficiency, inefficiency. Folks are willing to pay
more than that marginal cost, but you still have no
motivation to produce more. Because if you produce more, even though the price is
higher than the marginal cost, your marginal revenue is going to be below the marginal cost, and so you would be taking a hit in aggregate on those extra units.