Review of Revenue and Cost Graphs for a Monopoly

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“I want to do in this video is review. The revenue and cost graphs for for a monopoly for a monopoly. So let s up here let s draw the curve for the monopoly and we re just going to speak in general terms here for whatever our products that we re the only person that can produce. It is let s say the demand curve looks like this and i m just going to draw it as a line.

So we have a linear. We have a linear demand curve and this axis right over here is dollars per unit on the demand curve. You could view that as price and this horizontal axis is quantity now over here. What i want to do is i m still going to have quantity in the horizontal axis but in the vertical axis.

I m going to have dollars not dollars per unit. So i can use this to measure total revenue. So if i don t produce if i don t produce anything right over here if my quantity is 0. How much total revenue.

I m going to get regardless of what the price is well i m not going to get any total revenue. My total revenue measured in dollars is going to be 0. If my quantity is out here whatever this might be i m selling a lot. But i m selling it for free.

I m giving i m giving the product away so once again. I have no total revenue. So over there i have no total revenue and if we start over here each incremental unit. I m selling more and more or each incremental unit right over here.

I m getting more and more and more and more total revenue until some maximum point and then i get less and less and less total revenue and we saw that in previous video. So the total revenue graph was going to look something like that so that is total total revenue often abbreviated as tr now from the total revenue. We can think about we can look at this graph and we say look if we increase the quantity a very small unit how much are we increasing our total revenue and so when we do that we re essentially calculating marginal revenue marginal revenue tells us how much does our total revenue increase for a very small change in quantity and it s essentially the slope of this line. So the slope of the line.

There is very steep and we saw in the previous video that slope is right over here. It s at the same vertical intercept. As our demand..

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Curve and then it gets a little less steep little less steep. Let me draw more tangent. A little less deep a little less deep. Even less deep and then it the slope.

Actually becomes zero right here. And then it starts going and then it starts going negative. So right over here. If i wanted to plot the marginal revenue.

Which is the slope of the tangent line here it starts off very steeply positive and then it gets less positive less positive less positive it hits zero right around here right around here. So the marginal revenue curve looks like that and then it actually keeps going negative. And this the way i drew it this should be the zero point. And then it gets less steep and less deep just like that and we ve seen already we ve proven to ourselves that this marginal revenue curve has twice the slope of the demand curve.

This is the marginal revenue curve and actually i left off an e and curve for demand curve. So that describes kind of our revenue possibilities now. Let s think about our cost. Possibilities so down.

Here. Let me draw a total cost curve. So our total costs. So at first.

We don t have much variable cost. But we have some fixed costs and then as we produce more and more and more our variable costs increase and so our total costs might look something like that so that is total total costs and just from this graph down. Here we can actually start to visualize. What our economic profit is and whenever we re talking about profit in economic class 99 of the time.

We re talking about economic profit. We re taking into account all of the opportunity costs not just the explicit ones where we re paying money. But even the implicit ones kind of the lost opportunities that do to whatever we re doing here in this business and to visualize the economic profit..

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So right at this point so back here our total costs are more than our total revenue. So this is an economic loss this is break even now we re starting to make economic profit. The economic profit is just the difference between the total revenue at top and the total costs on the bottom. If you subtract total cost from total revenue.

You have your economic profit and i should be clear. This is this is total economic costs total economic cost opportunity just to make sure that we realize we re done what economic profit. Remember you could have economic profit breakeven you could have a normal profit. But you could still make an accounting profit.

So if you re if you say you have zero economic profit. It does not mean that you re not making any money. It just means that you re not making any money above and beyond your opportunity costs. But anyway.

Let s visualize so if we make even more quantity the difference between these two gets even bigger. So we re making even more economic profit. Even more economic profit. Even more economic profit and then right around here it seems like it starts to shrink again and we can think about it this way.

While we re in this zone. They re getting further and further apart right over here. They re getting further and further apart as long as the slope of the magenta line as long as the slope of our total revenue curve is larger than the slope of our total cost curve. The slope the slope of the total revenue curve is our marginal revenue.

The slope of our total cost curve is marginal cost and we can draw that so marginal cost will look something like this marginal costs will look something like we ve got a little bit different it would look something like that and you could see here as long as marginal revenue is larger than marginal cost. This is marginal cost that means that the slope of the total revenue is larger than the slope of the total cost so they re going to get further and further and further apart. But right when they re equal and then beyond the point that they re equal. They re going to start getting closer and closer together.

So at this point right over here. At this point. Right over here..

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The way. I drew it so this point right over. Here. This should be the same point right over here.

This is actually your maximum economic profit and you can visualize. It by the height right over here and we ve thought about it this way to looking at this chart. You say look that first unit. My incremental revenue on that first unit that s marginal revenue is much higher and you know that that first drop of whatever.

I m producing is much higher than the cost for that unit. So i i m making economic profit. So i m definitely going to produce that i m going to produce another one still a marginal revenue higher than marginal cost going to keep producing until marginal revenue is equal to marginal cost and at that point. I m not going to produce any more because if i produce any more my cost on those incremental units are going to be higher than my revenue on those incremental units.

And though i m going to get an economic loss on those units. And i m trying to maximize economic profit and if we want to visualize our economic profit up here we have to graph our average total costs. So let s think of it this way you re really taking your total costs you re dividing it by quantity so when you have a low quantity. You have a lot of fixed costs and and your fixed costs don t change.

But you have very low quantity you take a reasonably sized. Number divided by a very small number you get a very large number and let me do this in green. So i m going to plot our average total cost. It s going to start up there as long as our average total costs are higher than our marginal costs.

Then our average total costs are going to come down down down. So they re going to come down and down and down. And then right and then they re going to hit an equal point. And then right at that equal point.

That means that my marginal cost is for that extra that extra quantity of unit. The costs added are the same as my average total cost. And so the average total costs aren t going to go down any more and then as soon as the marginal costs are higher than my average total cost then each incremental unit is going to add to my my average total cost is going to start going up..

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It starts going to start averaging up so it s going to look something like you d see if i can draw it a little bit differently so let me let me draw. It so really the marginal cost and the average total cost should intersect at the minimum of the average total cost curve and i ll explain it again in a second so our average total cost code should look something let me draw it a little bit better than that so it could look something like something like that right over here and just to review. What i said so this is the average total cost as long as marginal costs as long as the cost for each incremental unit is lower than your average total cost then producing an extra unit since its costs are lower than the average. It s going to bring the average down.

It s going to keep bringing the average down. Until the marginal cost is the same as the average total cost now every incremental unit is higher than the previous average. So it s going to start averaging everything up in average total cost is going to go up again. So this should be the minimum point of the average total cost curve.

Now with that out of the way. We can visualize the economic profit and graph up here. If this is the quantity that we re producing this is our optimal quantity. Then we say well what is the price we re going to get in the market.

We go to the demand curve so we go to the demand curve that is the price that we are going to get for it. And then what is our cost per unit. You can view prices revenue per unit. Well our cost per unit is the average total cost curve.

That s there so this distance this yellow length right here this is essentially my economic profit per unit right it s my revenue per unit minus my average total cost per unit and if i want to get total economic profit. I multiply my economic profit per unit times total number of units. So this is the total number of units. So if i multiply this base times this height.

I get the area the area for this rectangle right there and that is my total economic profit total economic profit economic profit for in the case of this monopoly. If we didn t have a monopoly then we wouldn t have this downward sloping marginal revenue curve and we would actually if we were perfect if it was if we were dealing with perfect competition. We would have to be price takers in reactor. We would actually have ” .

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