Revenue Curves (TR, AR, and MR) in a Monopoly Market

A monopoly market is a market structure where there is only one firm producing or selling a particular good or service. In such a market, the product being sold does not have any close substitutes. Entry of other firms into the market is completely restricted. Since there is only one firm producing or selling the good or service, the term "firm" and "industry" become synonymous in a monopoly market.

A monopolist must reduce the price of a good or service to sell a higher quantity. Although there is only one producer or seller in a monopoly market, the number of buyers or consumers can be large.

Examples of Monopoly

Examples of monopolies include government control of essential resources like water and electricity, the petroleum sector in Nepal, and certain companies like Luxottica in the eyewear market, and Apple in the smartphone market.

In the context of Nepal, major monopoly institutions are:

• Nepal Electricity Authority
• Nepal Oil Corporation
• Nepal Telecom

These institutions have monopoly power in producing goods, setting prices, and selling their products.

Table 1.6 presents the total revenue, average revenue, and marginal revenue in a monopoly market.

Table 1.6: Total Revenue, Average Revenue, and Marginal Revenue in a Monopoly Market

From Table 1.6, it can be observed that as the quantity of goods sold increases, the price gradually decreases. However, while the quantity sold increases, total revenue initially rises, reaches a maximum point, and then starts to decline. Similarly, as the quantity sold increases, marginal revenue gradually decreases, reaches zero, and eventually becomes negative.

Based on Table 1.6, the revenue curves for a monopoly market are illustrated in Graph 1.6.

Graph 1.6. TR, AR, and MR under Monopoly Market

Analysis of Revenue Curves in a Monopoly Market

(a) Total Revenue Curve

In Section A of Graph 1.6, the X-axis represents the quantity sold, while the Y-axis measures total revenue. The total revenue curve (TR curve) starts from the origin, indicating that when the quantity sold is zero, total revenue is also zero. As the quantity sold increases, the total revenue curve initially rises but at a decreasing rate. It reaches a maximum point and then starts to decline.

(b) Average Revenue and Marginal Revenue Curves

In Section B of Graph 1.6, the X-axis represents the quantity sold, while the Y-axis measures average and marginal revenue.

• The average revenue curve (AR curve) is also known as the demand curve for a monopoly firm. It slopes downward, indicating that a monopolist must reduce the price to sell a higher quantity.
• The marginal revenue curve (MR curve) lies below the demand curve because the monopolist's marginal revenue is always less than the price of the good.

At the point where six units of the good are sold, the total revenue curve reaches its maximum point, and the marginal revenue curve touches the X-axis (MR = 0). Beyond this point, if the quantity sold continues to increase, the total revenue starts decreasing, and the marginal revenue becomes negative.