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## AP®︎/College Microeconomics

### Course: AP®︎/College Microeconomics>Unit 4

Lesson 1: Introduction to imperfect competition

# Marginal revenue and marginal cost in imperfect competition

This video discusses the differences in a graph of marginal cost and marginal revenue for an imperfectly competitive firm compared to a perfectly competitive firm.

## Want to join the conversation?

• 1) Do we posit that demand decreases in the imperfectly-competitive market () because the firm would need a higher price to produce more...which would decrease demand?

More generally, how are the demand-, marginal revenue-, and price curves related here?

2) Is the 'inefficiency' (), multiplied by quantity, the firm's profit?

3) Does the inefficiency () invite competitors (assuming they can produce a similar-enough product)? I can see this in 2 ways: 1, (if the inefficiency is profit) others may wish to claim some of the profit; 2, the inefficiency reflects an unsupplied demand that another firm could supply while keeping MC </= MR.
• Something doesn't seem to make any sense.

MAYBE It's because in "marginal revenue" comparisons here we are not just comparing the scenario where "one more item" is sold at the market price.

If the market price is \$10, then the marginal revenue for every single item sold would be \$10. But for some reason we're comparing different scenarios entirely, in this vid and the last, eg the scenario where they are sold for \$50 as market price for all, compared with the scenario where they are sold for \$10 market price for all. But within each of those scenarios, the "marginal revenue" is not being treated as the revenue for selling "one more item" at the market price AT ALL.

Anyway, the point is this: if the demand curve represents how many would be bought at a specific price,(as suggested eg in onwards) then up until the marginal cost = the "amount that would be bought at a specific price" then there is still profit, and the marginal revenue exceeds the marginal cost.

If selling "one more" at a given price brings in more money than the marginal cost, how can it ever POSSIBLY be the case that the "marginal revenue" is actually BELOW the "marginal cost" as alleged in this video, and building on "types of competition and marginal revenue"?
• Marginal revenue is the "revenue from selling one more item," but more specifically it's the "change in total revenue if we sell one more item."

If we sell another item (called I) and Price is still above MC, the cost of producing I will be less than the price we can sell it for; so yes, we would make a profit on I.
BUT, following the downward slope of the demand curve, if we sell I, we would be accepting a lower price, on all of the items we sell. So although we get a profit from selling I, we LOSE REVENUE bc we're selling all our other items at a lower price than before. If the extra profit we get from selling I doesn't outweigh the effect of us losing revenue from having to sell everything else at a lower price, then it wouldn't make sense for us to sell I, even if we could make a profit from I.