Monopoly is a market structure characterized by the assistance of a single producer seller of a commodity which has low close substitute Institution and there are strong barriers to entry under Monopoly the demand curve of a firm for its product slopes downward from left to right. It shows that such a Monopoly firm can sell more only at a lower price. Hence, total revenue increases at a diminishing rate.
Derivation of TR, AR, and MR curves under Monopoly
A Monopoly firm can influence the price. It is a price maker. A monopolist can charge a high price only by reducing the supply of his product. Can fix the price of his product and sell the quantity demanded by consumers.
Under Monopoly price is lowered to sell more quantity. When the AR or prize declines the MR also Falls. So that net additional made to the TR will be less than the price of AR. Hence, the TR of a Monopoly firm increases at a diminishing rate.
Derivation of TR Curve
The TR Curve is derived from the above-mentioned schedule. The various amount of revenue against different quantities are plotted and join together to drive a concave downward TR curve. As price falls successively from Rs 10 to Rs 4; the TR increases at a diminishing rate from Rs 10 to Rs 30 and thereafter decreases as the quantity sold of a commodity increase from 1 unit to 2 units, 3 units, 4 Units, 5 units, 6 units, and 7 units respectively.
Derivation of AR and MR Curve
The AR and MR curves are derived from the above-mentioned table. The various amount of revenues (AR and MR) corresponding to different prices are plotted against their respective quantities and join together to develop both the downward sloping AR and MR curves.
Under an imperfect market, the AR curve of an individual firm slopes downward from left to right. This is because; a firm can sell larger quantities only when it reduces the price. Hence, the AR curve has a negative slope. MR curve is similar to that of the AR curve. But MR is less than AR. AR and MR curves are different. Generally, the MR curve lies below the AR curve. Under both Monopoly and monopolistic competition, the AR curve slopes downward. But under monopolistic competition, it is more elastic. This is because under Monopoly there is a lack of close substitutes of the Monopoly product whereas there are large numbers of close substitutes of the product in monopolistic competition.
Relationship between AR and MR curves
A. Under perfect competition
MR is always equal to TR from an individual firm's point of view. In this case, the AR curve is horizontal to the x-axis, and the MR curve coincides with the AR curve.
B. Under imperfect market and monopoly
When AR and MR curves are downward sloping linear straight lines, the MR curve lies below the AR curve. In such a situation is exactly halfway between the AR curve and Y-axis. This is because the MR falls twice the fall in price at each level of output. It may be noted that PA =AB in the figure below.
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