- [Instructor] In this video,
we're going to think about
marginal revenue and marginal cost
for a firm in an imperfectly
competitive market.
But before we do that, I just
want to be able to review
and compare to what we already know
about a firm in a perfectly
competitive market.
So right over here, we're
analyzing the firm's economics.
This shows the marginal cost
as a function of quantity,
and we've talked about this before.
Oftentimes, it will trend down initially,
as you have better specialization
and some efficiencies,
and then it might start trending up,
as there are just coordination costs
or other costs that make
the marginal cost go up.
And we have talked about this notion that,
in a perfectly competitive market,
the firm is a price-taker.
There's going to be some market price,
let's call this P sub m,
some price in the market
for the good that they are producing,
and there's many producers
who are producing this good.
And they're undifferentiated,
and there's no barriers to entry.
And so they just have to
be price-takers there.
No matter how many units they produce,
they're just going to be able
to get that same market price.
So a firm in a perfectly
competitive market,
that market price defines
their marginal revenue curve.
Their marginal revenue
curve will essentially
just be a horizontal line like this,
and we've already studied
this in previous videos.
And we talked about that here,
if this firm was trying
to maximize its profit
and if it was rational, it
would produce the quantity
where marginal cost is
equal to marginal revenue.
So it would produce this
quantity right over here.
But now let's think about how
things are a bit different
for a firm in an imperfectly
competitive market.
In a previous video, we talked about how,
in an imperfectly competitive market,
there's some differentiation
amongst the various
players who are competing,
and so their market price
is a function of quantity.
If they just produce a
bunch of their product,
the price that they get in the
market is likely to go down.
So they will have their own
firm-specific demand curve.
Maybe it looks something like this.
So that is their demand curve.
And we also saw in that
video that that demand curve,
essentially the price that
they could get at any quantity,
that that's not going to be the same
as the marginal revenue curve.
If the demand curve is
downward-sloping like that,
the marginal revenue curve is likely
to be even more downward-sloping.
So it's going to look something like this.
That would be the marginal revenue curve.
Now in this situation,
what would be rational for the firm to do?
Well, once again, it would
want to produce the quantity
where the marginal cost is
equal to the marginal revenue.
So they would want to produce
this quantity right over here.
But you see something interesting here.
If they produce at this quantity,
notice the price that
they can get in the market
is much higher than that.
The price that they get in the market
is higher than the marginal cost
and the marginal revenue at that point.
And because we see a situation
where price is greater
than your marginal cost,
versus in a perfectly competitive market
where you see that price
is equal to marginal cost,
that that is the optimal quantity,
but because you have this gap,
that people are willing to pay
more than that marginal cost.
But you still aren't going to
be able to produce any more
because it doesn't make sense
from a marginal revenue point of view.
This gap,
the difference between the
price and the marginal cost
at this rational quantity for this firm
in an imperfectly competitive
market to produce,
economists would refer to
this as an inefficiency,
inefficiency.
Folks are willing to pay
more than that marginal cost,
but you still have no
motivation to produce more.
Because if you produce more,
even though the price is
higher than the marginal cost,
your marginal revenue is going
to be below the marginal cost,
and so you would be taking a hit
in aggregate on those extra units.
