- [Instructor] We've already had several videos
where we talk about the types of markets
that we might look at in economics.
At one end, you might have perfect competition,
let's write perfect comp,
and this is where you have many firms,
what they produce is not differentiated,
there is no barriers to entry,
and in that situation, we have looked at
that the market price,
the firms just have to take that market price,
and that market price is going to describe what
their marginal revenue is going to be.
No matter how much each of those individual firms produce,
they're just going to get that market price,
so that marginal revenue will be that market price,
but then we looked at a whole
sort of what we could call imperfectly competitive firms,
imperfectly, imperfect competition.
At the extreme, you have the monopoly,
where you only have one firm in the market,
huge barriers to entry and
so that company or that firm essentially is the market
and so their demand curve for their product essentially
is the market demand curve.
But in between, you have things
like monopolistic competition right over there,
and in monopolistic competition,
you have many firms that are competing
but they are all differentiated in some way,
and there are some barriers to entry.
A good example of monopolistic competition
or imperfect competition might be the athletic shoe market.
In the athletic shoe market,
you have many competitors,
you have your Nike, Adidas,
Reebok, and I could keep listing names,
and they are all differentiated in their own way,
they all have their own brands,
which they have built up over time,
they have associations with certain sports figures,
some their shoes might be perceived as better
in certain categories, but they
are also competing with each other.
So the competition is that they
are competing with each other
but you could consider monopolistic competition
because only Nike can sell,
well, Nike shoes, and so you could imagine a demand curve
for say only Nike shoes,
so in imperfect competition,
every firm would have their own unique demand curve,
and how much they produce actually will affect the price
that they get for the product or the service,
and what we're going to see in this video is when
we are dealing with imperfect competition,
the demand curve, the price,
isn't exactly what marginal revenue is going to be,
and to understand that, let's look at a simple model here.
So right over here, I have a very simple model
of a demand curve for a firm
in an imperfectly competitive market,
and you can see here that the more
that that firm produces of its goods,
the lower price it can get for that good,
and we can see very clearly this
is a classic downward sloping demand curve,
but what's going to be really interesting is to think about,
what is going to be the marginal revenue,
especially the marginal revenue in a world
where if they sell one unit,
they get 32.50, but when they sell two units,
it's not like they'll get 32.50 for one of those units
and then they'll get 25 for the second unit.
If you have a market price out there for $25, you're
going to get $25 on all two units,
so even though someone was willing to pay 32.50 for one,
they are still only going
to pay $25, so let's think about what
that does to the marginal revenue.
I encourage you to pause this video
and try to fill out this table
yourself before I do it with you.
All right, now let's do it together,
so our total revenue, obviously when we sell nothing,
we have, let me do this in another color,
we have zero total revenue.
Now, when we sell one unit at 32.50, well,
then our total revenue is
going to be 32.50, no surprise there.
Now it's going to get interesting.
When we sell two units,
what's going to be our total revenue?
Well, both of those units are gonna be sold at $25,
it's not like, as I just said, it's not
like that first person is still willing to pay 32.50,
like hey, your market price is $25,
that's what everyone is going to pay,
so now your total revenue is $50, two times $25.
Now when you go to three,
the market price that you can get is 17.50, let's see,
that is going to be, 52.50.
52.50 of total revenue,
and then if you, if your market price was $10, you could
have a quantity of four.
If you wanted to sell four,
you could do so at a price
of $10, you can do it in either way,
but then your total revenue is going to be $40.
Now, from this, we can think about, well,
what's our marginal revenue?
Well, our marginal revenue for that first unit
is the same as what the price
of that first unit is, we went from zero to 32.50 with
that first unit, so that's 32.50 right over here,
but what about as we go
from that first unit to that second unit?
Well, our units go up by one,
but our revenue from 32.50 to 50 goes up by 17.50,
and so we are already seeing
that there is a discrepancy between our marginal revenue
and our price, and we can going.
When we go from two to three units,
our revenue only goes up by 2.50,
and so that's going to be our marginal revenue,
and then something very interesting happens.
As we go from three units to four units,
our total revenue actually goes down,
it goes down by 12.50, negative 12.50 right over here,
and that's because when the price gets that low,
you are taking a hit on all of the units
that you are selling, so you'll actually get a lower
total revenue right over here, and if we plotted,
we'll see very clearly that the marginal revenue curve,
the parts from the demand curve for that firm
that's competing in an imperfectly competitive market,
and so we can see here at one unit,
our marginal revenue is the same, but at two units,
our marginal revenue is 17.50, at three units,
our marginal revenue is 2.50,
and so we have a marginal revenue curve
that looks more like this.
So the big takeaway is here
that a firm that's operating in an imperfectly market.
It isn't just a price taker,
it's not that no matter how much it produces it's
going to get the same price,
it's going to have its own unique demand curve,
because there is some differentiation in the market,
and so it's going to have a downward sloping demand curve,
and because of that downward sloping demand curve,
you are also going to have
a downward sloping marginal revenue curve
and that marginal revenue curve is actually
going to be downward sloping at a steeper rate,
so when we start doing the firm analysis
of marginal cost and where does it intersect
the marginal revenue, if you're dealing with a firm
that's operating in a perfectly competitive market,
that marginal revenue curve when we've seen it before
was horizontal, but when we think about
that marginal revenue curve for a firm
in an imperfectly competitive market,
that's going to be downward sloping,
it's going to be sloping downward faster
than its demand curve.