A monopolist therefore faces a tradeoff between the price it charges and
the quantity it sells. For a monopolist, sales can be increased only if price
is reduced, and price can be increased only if sales are reduced.
Average Revenue
Starting with the market demand curve, we can readily derive the
monopolist’s average and marginal revenue curves. When the monopolist
charges the same price for all units sold, its total revenue (TR) is simply
equal to the single price times the quantity sold:
Since average revenue is total revenue divided by quantity, it follows that
average revenue is equal to the price:
And since the demand curve shows the price of the product, it follows
that the demand curve is also the monopolist’s average revenue curve.
Marginal Revenue
Now let’s consider the monopolist’s marginal revenue—the revenue
resulting from the sale of one more unit of the product. Because its
demand curve is negatively sloped, the monopolist must reduce the price
that it charges on all units in order to sell an extra unit. But this implies
TR=p×QAR= TQR =p×QQ =p