sell that 10th diamond, De Beers must reduce the price on all its diamonds from $550 to
$500. So it loses 9 ×$50=$450 in revenue, the orange-shaded area. So, as point Cindi-
cates, the total effect on revenue of selling one more diamond—the marginal revenue—
derived from an increase in diamond sales from 9 to 10 is only $50.
Point Clies on the monopolist’s marginal revenue curve, labeled MRin panel (a) of
Figure 61.2 and taken from the last column of Table 61.1. The crucial point about the
monopolist’s marginal revenue curve is that it is always belowthe demand curve. That’s
because of the price effect, which means that a monopolist’s marginal revenue from
selling an additional unit is always less than the price the monopolist receives for that
unit. It is the price effect that creates the wedge between the monopolist’s marginal rev-
enue curve and the demand curve: in order to sell an additional diamond, De Beers
must cut the market price on all units sold.
In fact, this wedge exists for any firm that possesses market power, such as an oligopo-
list, except in the case of price discrimination as explained in Module 63. Having market610 section 11 Market Structures: Perfect Competition and Monopoly
Demand, Total Revenue, and Marginal Revenue for the De Beers Diamond Monopolytable61.1
$0
950
1,800
2,550
3,200
3,750
4,200
4,550
4,800
4,950
5,000
4,950
4,800
4,550
4,200
3,750
3,200
2,550
1,800
950
0$950
850
750
650
550
450
350
250
150
50
− 50
− 150
− 250
− 350
− 450
− 550
− 650
− 750
− 850
− 9500 1 2 3 4 5 6 7 8 910
11
12
13
14
15
16
17
18
19
20$1,000
950
900
850
800
750
700
650
600
550
500
450
400
350
300
250
200
150
100
50
0Price of
diamond
PQuantity of
diamonds
demanded
QTotal
revenue
TR=P×QMarginal
revenue
MR=ΔTR/ΔQ