Do companies literally draw a graph like this and look for where two lines intersect? No. This is a stylized description of a generic firm's optimization problem. It applies _loosely_ to all industries, at the cost of not applying _exactly_ to any.
By the way, these models do apply to _all_ firms in their selling and buying decisions - not just to monopolists and monopsonists. The adjustment you need to make is to consider the demand/ supply curves applicable to _that firm_ as opposed to the market overall. For a firm deciding how much output to produce, their demand curve depends on the level of competition they face. A monopolist faces market demand, but a firm with direct competitors faces flatter (more elastic) demand (if they were to increase price, the quantity they are able to sell drops much faster). In the extreme, we have perfect competition, where each firm faces perfectly elastic (horizontal) demand, at whatever level the current market price is. You can still apply the monopoly model, but the marginal revenue curve will now also be horizontal, so the firm will produce the efficient quantity (i.e., where MC=MB).
Marginal benefit equals demand whenever the demand side of the market is competitive - meaning that there are many small buyers acting independently - and that includes the monopoly model. (Remember that the demand curve shows us how much buyers are willing to pay for the next unit of the good, at any given quantity level. Each buyer would prefer to pay less than their marginal benefit, but they have to outbid all other buyers.)
Thank you, great video, everything is clearly explained
super helpful! thank you
Is that how companies set their prices? Is this applicable in industry?
Do companies literally draw a graph like this and look for where two lines intersect? No. This is a stylized description of a generic firm's optimization problem.
It applies _loosely_ to all industries, at the cost of not applying _exactly_ to any.
By the way, these models do apply to _all_ firms in their selling and buying decisions - not just to monopolists and monopsonists. The adjustment you need to make is to consider the demand/ supply curves applicable to _that firm_ as opposed to the market overall.
For a firm deciding how much output to produce, their demand curve depends on the level of competition they face. A monopolist faces market demand, but a firm with direct competitors faces flatter (more elastic) demand (if they were to increase price, the quantity they are able to sell drops much faster).
In the extreme, we have perfect competition, where each firm faces perfectly elastic (horizontal) demand, at whatever level the current market price is. You can still apply the monopoly model, but the marginal revenue curve will now also be horizontal, so the firm will produce the efficient quantity (i.e., where MC=MB).
Your videos are really awesome 💕...
Is it always set that marginal benefit equals demand in a monopoly? Thanks for all the explanation:)
Marginal benefit equals demand whenever the demand side of the market is competitive - meaning that there are many small buyers acting independently - and that includes the monopoly model.
(Remember that the demand curve shows us how much buyers are willing to pay for the next unit of the good, at any given quantity level. Each buyer would prefer to pay less than their marginal benefit, but they have to outbid all other buyers.)
Thank you very much! Didn't expect an answer this quick! ;)
Glad I could help! :)