AP_Krugman_Textbook

power means that the firm faces a downward-sloping demand curve. As a result, there
will always be a price effect from an increase in output for a firm with market power that
charges every customer the same price. So for such a firm, the marginal revenue curve
always lies below the demand curve.
Take a moment to compare the monopolist’s marginal revenue curve with the mar-
ginal revenue curve for a perfectly competitive firm, which has no market power. For
such a firm there is no price effect from an increase in output: its marginal revenue
curve is simply its horizontal demand curve. So for a perfectly competitive firm, market
price and marginal revenue are always equal.

module 61 Introduction to Monopoly 611

Section 11 Market Structures: Perfect Competition and Monopoly

figure 61.2

A Monopolist’s Demand,

Total Revenue, and

Marginal Revenue

Curves

Panel (a) shows the monopolist’s de-

mand and marginal revenue curves for

diamonds from Table 61.1. The mar-

ginal revenue curve lies below the de-

mand curve. To see why, consider

point Aon the demand curve, where

9 diamonds are sold at $550 each,

generating total revenue of $4,950. To

sell a 10th diamond, the price on all

10 diamonds must be cut to $500, as

shown by point B.As a result, total

revenue increases by the green area

(the quantity effect: +$500) but de-

creases by the orange area (the price

effect: −$450). So the marginal rev-

enue from the 10th diamond is $50

(the difference between the green and

orange areas), which is much lower

than its price, $500. Panel (b) shows

the monopolist’s total revenue curve

for diamonds. As output goes from 0

to 10 diamonds, total revenue in-

creases. It reaches its maximum at

10 diamonds—the level at which mar-

ginal revenue is equal to 0—and de-

clines thereafter. The quantity effect

dominates the price effect when total

revenue is rising; the price effect dom-

inates the quantity effect when total

revenue is falling.

A

MR

TR

D

(a) Demand and Marginal Revenue

910 20

$1,000

–200

–400

500

550

0

50

Quantity of diamonds

Price,

marginal revenue

of diamond

(b) Total Revenue

01020

$5,000

4,000

3,000

2,000

1,000

Quantity of diamonds

Total

revenue

B

C

Price effect

= –$450

Quantity effect

= +$500

Marginal revenue = $50

Quantity effect

dominates price effect.

Price effect dominates

quantity effect.