Market Demand and Revenue Curves under Monopoly

A monopoly firm faces the market demand curve for the product it produces since it is the only seller of the product. Thus the monopolist demand curve will slope downwards. This situation  is different  from the horizontal  demand  curve  facing  the competitive  firm. While  the  competitive  firm  is  the  price  taker,  monopoly  firm  is  the  price  maker.  The monopoly firm supplies the total market and can set any price it wants. Since the monopoly firm faces a downward slopping market demand curve, if it raises price, the amount  it cal sell will fall. Much of the analysis  of monopoly  and the differences  in output and pricing decisions between a monopoly and competitive  industry stems from this difference in the demand curves.

It is important to note that, given the demand curve, a monopoly firm has the option to choose between the price to be charged or output to be sold. Once it chooses the price, the demand  for its output  is fixed.  Similarly,  if the  firm  decides  to sell a certain  quantity  of output, then its price is fixed- it cannot charge any other price inconsistent with the demand curve. Since the monopoly firm faces a downward slopping market demand curve, in order to sell more units of the commodity, the monopoly firm must lower the price. As a result, the marginal revenue is smaller than the price and the monopolist marginal revenue curve lies below his demand curve. This is shown in the following table

It can be noted that the monopolist  faces a downward  sloping  AR curve  (demand curve) and MR is less than AR. The implication of MR is less than AR (or price) is that when the monopolist  sells more the price of the product falls. The demand curve and MR curve facing the monopolist is shown below.

Thus,  the  key  difference  between  a competitive  firm  and  a  monopoly  is the  monopoly’s ability to influence the price of its output. A competitive firm is small relative to the market in which it operates. Therefore, it takes the price of its output as given by market conditions. By contrast, because a monopolist is the sole producer in its market, it can alter the price of its good by adjusting the quantity it supplies to the market. One way to view this difference between competitive firm and a monopoly is to consider the demand curve that each firm faces. This is shown below.

Because a competitive firm can sell as much or as little as it wants at given price, the competitive  firm faces a horizontal  demand curve. In effect, because the competitive  firm sells a product with many perfect substitutes, the demand curve that any one firm faces is perfectly elastic. By contrast, because the monopolist is the sole producer in the market, its demand   curve   is   the   market   demand   curve.   The   monopolist   demand   curve   slope downwards.  If the monopolist  raises  the price  of its good,  consumers  buy less of it. The market demand curve provides a constraint on monopolist ability to profit from his market power. By adjusting the quantity producer or price charged, the monopolist can choose any point on the demand curve, but it cannot choose a point off the demand curve.