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Types of competition and marginal revenue

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Video transcript

we've already had several videos where we talk about the types of markets that we might look at in economics at one end you might have perfect competition that's right perfect comp and this is where you have many firms they what they produce is not differentiated there's no barriers to entry and in that situation we have looked at that the market price the firm's just have to take that market price and that market price is going to describe what their marginal revenue is going to be no matter how much each of those individual firms produce they're just going to get that market price so that marginal revenue will be that market price but then we looked at a whole sort of what we could call imperfectly competitive firms imperfectly imperfect competition at the extreme you have the monopolies where you only have one firm in the market huge barriers to entry and so that that company or that firm essentially is the market and so their demand curve for their product essentially is the market demand curve but in between you have things like monopolistic competition right over there and a monopolistic competition you have many firms that are competing but they're all differentiated in some way and there are some barriers to entry a good example of monopolistic competition or imperfect competition might be the athletic shoe market in the athletic shoe market you have many competitors you have your Nike Adidas Reebok and I could keep listing names and they are all differentiated in their own way they all have their own brands which they've built up over time they have associations with certain sports figures some of their shoes might be perceived as better in certain categories but they are also competing with each other so the competition is that they're competing with each other but you could consider it a monopolistic competition because only Nike can sell well Nike shoes and so you can imagine a demand curve for say only Nike shoes so in an imperfect competition every firm would have their own unique demand curve and how much they produce actually will affect the price that they get for the product or the service and what we're going to see in this video is when we're dealing with imperfect competition the demand curve the price is exactly what marginal revenue is going to be and to understand that let's look at a simple model here so right over here I have a very simple model of a demand curve for a firm in an imperfectly competitive market and you can see here that the more that that firm produces of its goods the less the lower pricing can get for that good and we can see very clearly this is a classic downward sloping demand curve but what's going to be really interesting is to think about what is going to be the marginal revenue especially the marginal revenue in a world where if they sell one unit they get 30 to 50 but when they sell two units it's not like they'll get thirty to fifty for one of those units and then they'll get twenty-five for the second unit if you're if you have a market price out there for twenty-five dollars you're going to get twenty-five dollars on all two units so even though someone was willing to pay thirty to fifty for one they're still only going to pay twenty-five dollars so let's think about what that does to the marginal revenue I encourage you to pause this video and try to fill out this table yourself before I do it with you all right now let's do it together so our total revenue obviously when we sell nothing we have let me do this in another color we have zero total revenue now when we sell one unit at thirty two fifty well then our total revenue is going to be thirty to fifty no surprise there now it's going to get interesting when we sell two units what's going to be our total revenue well both of those units are going to be sold at twenty-five dollars it's not like you as I just said it's not like that first person is still willing to pay thirty to fifty like hey your market price is $25 that's what everyone's going to pay so now your total revenue is $50 two times $25 now when you go to three the market price that you can get a 1750 let's see that is going to be fifty to fifty fifty to fifty of total revenue and then if you if your market price was $10 you could you could have a quantity of four if you wanted to sell four you could do so at a price of $10 you can do it either way but then your total revenue is going to be $40 now from this we can think about well what's our marginal revenue well our marginal revenue for that first unit is the same as what the price of that first unit is we went from zero to thirty to fifty with that first unit so that's 3250 right over here but what about as we go from that first unit to that second unit well our units go up by one but our revenue from thirty to fifty to fifty goes up by seventeen fifty and so you're already seeing that there's a discrepancy between our marginal revenue and our price and we can keep going when we go from two to three units our revenue only goes up by two fifty and so that's going to be our marginal revenue and then something very interesting happens as we go from three units to four units our total revenue actually goes down it goes down by twelve fifty negative 1250 all right over here and that's because when the price gets that low you are taking a hit on all of the units that you're selling so you actually get a lower total revenue right over here and if we plot it we can we'll see very clearly that the marginal revenue curve departs from the demand curve for that firm that's competing in an imperfectly competitive market and so we can see here at one unit our marginal revenue is the same but at two units our marginal revenue is 1750 at three units our marginal revenue is 250 and so we have a marginal revenue curve that looks more like this so the big takeaways here that is a firm that's operating in an imperfectly competitive market it isn't just a price taker it's not that no matter how much it produces it's going to get the same price it's going to have its own unique demand curve because there is some differentiation in the market and so it's going to have a downward sloping demand curve and because of that downward sloping demand curve you are also going to have a downward sloping marginal revenue curve and that marginal revenue curve is actually going to be downward sloping at a steeper rate so when we start doing the firm analysis of marginal cost and where does it intersect the marginal revenue if you're dealing with a firm that's operating in a perfectly competitive market that marginal revenue curve when we've seen it before it was horizontal but when we think about that marginal revenue curve for a firm in an imperfectly competitive market that's going to be downward sloping it's going to be sloping downward faster then its demand curve