Narrator: Marge is a monopolist - ostrich burger lovers in Pleasantville have nowhere else to go but to Margeís restaurant. In such a small town, the size of the market is a barrier to entry for other ostrich burger sellers.
Narrator: Though Marge is a monopolist, she is still subject to market demand.
Narrator: The quantity of ostrich burgers Marge sells at a particular price is determined by demand.
Narrator: Marge's doesn't know where to set prices to maximize profits.
Marge: Last week I set my price at $4 a burger. At that price, I sold 100 burgers a day, bringing in a total revenue of $400.
Marge: This week I lowered my price to $3 a burger. At the lower price, Iíve been able to sell 200 burgers a day, and my total revenue each day has been $600.
Marge: When you think about it, I took in $300 for the second hundred burgers.
Marge: But I gave up $100 on the sale of the first 100 burgers. So, by increasing my sales from 100 to 200 burgers, I had a net gain of $200.
Narrator: Marge is alluding to the concept of marginal revenue, which is the addition to total revenue from selling one more unit of output. When Marge sells burgers at $3 a piece, she can sell 200 burgers and receive a revenue of $600. To sell more burgers, she needs to lower her price.
Narrator: What if Marge wanted to sell just one more burger per day? She would have to lower her price to $2.99. Selling all 201 burgers at that price would bring in a total revenue of $600.99. Her marginal revenue for one more burger is 99 cents.
Narrator: Why doesn't Marge just keep making more burgers to increase revenue? Letís take another look at the demand curve.
Marge: If I want to sell 300 burgers a day I need to lower my price to $2.00 per burger. At that rate I'd take in $600 a day, the same as if I were selling just 200 burgers at the higher price---and I haven't even considered my costs yet!
Narrator: Marge has discovered that her marginal revenue decreases as she increases her production and lowers prices to sell more burgers.
Narrator: Because Marge is the sole producer for a market with a downward-sloping demand curve, both price and marginal revenue decrease as quantity demanded increases. For the monopolist, marginal revenue is always less than price.
Narrator: In this case, the curve for total revenue rises to a maximum where quantity equals 250 burgers, then falls, reflecting a negative marginal revenue at higher levels of production.
Narrator: The profit-maximizing monopolist will operate only in the portion of demand for which marginal revenue is positive.
Narrator: Increasing revenue is important, but to maximize profit, Marge must consider her costs. Profit is revenue minus costs. Total costs rise with increases in production. As you know, the measure of this incremental change is the marginal cost, which at first decreases then rises sharply at higher levels of production.
Narrator: Marge earns a profit when the total revenue curve lies above the total cost curve. Maximum profit occurs when total revenue is as far above total cost as possible. This is also the point where marginal revenue equals marginal cost. This is the golden rule of profit maximization.
Marge: Ah, that's where I should set my price to make the most profits.
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