[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

The extent to which output is curtailed depends on the magnitude of the difference
between marginal revenue and price. This in turn depends on the shape of the
demand curve. When demand curves are very elastic (relatively flat), prices do not
fall much when output increases. As shown in Figure 12.3A, marginal revenue is not
much less than price. The firm produces at Q m , where marginal revenue equals marginal
cost. Q m is slightly less than the competitive output, Q c , where price equals
marginal cost. When demand curves are less elastic, as in panel B, prices may fall a
considerable amount when output increases, and then the extra revenue the firm
receives from producing an extra unit of output will be much less than the price
received from selling that unit.
The larger the elasticity of demand, the smaller the discrepancy between marginal
revenue and price.
Wrap-Up
THE FIRM’S SUPPLY DECISION
All firms maximize profits at the point where marginal revenue (the revenue from
selling an extra unit of the product) equals marginal cost. For a competitive firm,
marginal revenue equals price. For a monopoly, marginal revenue is less than price.
AN EXAMPLE: THE ABC-MENT COMPANY
Table 12.1 gives the demand curve facing the ABC-ment Company, which has a
monopoly on the production of cement in its area. There is a particular price at
which it can sell each level of output. As it lowers its price, it can sell more cement.
Local builders will, for instance, use more cement and less wood and other materials
in constructing a house.
For the sake of simplicity, we assume cement is sold in units of 1,000 cubic yards.
At a price of $10,000 per unit (of 1,000 cubic yards), the firm sells 1 unit; at a price
TABLE 12.1
DEMAND CURVE FACING THE ABC-MENT COMPANY
Cubic yards Total Marginal Total Marginal
(thousands) Price revenues revenues costs costs
1 $10,000 $10,000 $8,000 $15,000 $2,000
2 $ 9,000 $18,000 $6,000 $17,000 $3,000
3 $ 8,000 $24,000 $4,000 $20,000 $4,000
4 $ 7,000 $28,000 $2,000 $24,000 $5,000
5 $ 6,000 $30,000 0 $29,000 $6,000
6 $ 5,000 $30,000 $35,000
264 ∂ CHAPTER 12 MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY