DSE Economics | Market Structure and Firm Behaviour Lesson-Prep Guide (for tutors) | MR = MC, profit maximisation, price discrimination

2026-11-03

Tutor lesson-prep guides · Secondary Economics

Students can say “monopolies raise prices” but not by how much. This lesson makes them compute a number with MR = MC, then use elasticity to explain why a monopolist never charges the maximum price.

Objectives — Students can: (1) classify the four market structures with the four features (number of firms, product differentiation, entry barriers, price influence); (2) derive MR from a demand function and solve MR = MC for the profit-maximising output and price; (3) explain why a monopolist never produces where demand is inelastic.

01 Prerequisites (3-minute check)

If any of these fails, fix it before the lesson starts.

Skill	Quick check	Pass mark
Law of demand	Price up, quantity demanded?	Falls
Total revenue	TR equals what?	P times Q
Marginal cost	What is MC?	The extra cost of one more unit

02 Lesson flow (60 minutes)

Time	Stage	Tutor does	Student does
0-10 min	Four structures	Firms, differentiation, barriers, price power	Complete the table
10-24 min	MR from demand	P = 100 – 2Q gives MR = 100 – 4Q	Write the MR function
24-40 min	Profit maximisation	MR = MC gives Q = 20, P = 60	Profit = 600
40-52 min	Elasticity and pricing	Cut price only when demand is elastic	Predict the revenue change
52-56 min	Answer format	Definition, diagram, conclusion	Rewrite one answer
56-60 min	Exit check	Three questions collected and marked	Independent

03 Teaching script (read it out)

Scene 1: Four structures, four features, one table

Perfect competition: very many firms, homogeneous product, free entry, price taker, so P = MR = AR.
Monopolistic competition: many firms, differentiated products, free entry, slight price power.
Oligopoly: few firms, mutual dependence, entry barriers; collusion looks like monopoly, competition looks like a price war.
Monopoly: one firm, no close substitute, high entry barriers, can set price but is limited by demand.

Ask the student: which Hong Kong industry is closest to oligopoly (local mobile networks, three or four major operators).

Scene 2: MR = MC: one equation sets price and output

Demand is P = 100 – 2Q, so TR = 100Q – 2Q squared and MR = 100 – 4Q.
With MC = 20: 100 – 4Q = 20 gives Q = 20, and substituting back gives P = 60 with TR = 1200.
TC = 20Q + 200 = 600, so profit = 1200 – 600 = 600. Note P = 60 exceeds MC = 20, and that gap is monopoly pricing power.

Ask the student to compute: if fixed cost doubles to 400, do Q and P change (no, fixed cost does not affect MC)?

Scene 3: Elasticity: why the price is not pushed to the maximum

Above the midpoint of a linear demand curve (elastic), a price cut raises TR; below it (inelastic), a price rise raises TR but costs also rise.
A monopolist always operates where demand is elastic, because only there is MR positive; TR peaks where MR = 0.
Example: price up 2 percent with quantity down 2 percent changes revenue by about 0 percent, which is unit elasticity.

Remind: price discrimination such as student tickets works only with no resale and different elasticities.

04 Question types and worked steps

Type	Example	Steps	Answer
Identify	Which structure does an industry fit	Check the four features in order	Oligopoly or monopoly
Calculate	MR from demand	Double the slope of demand	MR = 100 – 4Q
Calculate	Profit-maximising output and price	Solve MR = MC, substitute into demand	Q = 20, P = 60
Explain	Why price discrimination fails	Resale possible, same elasticity	Either condition breaks it

Sanity check (teach this): The profit-maximising output must come before MR turns negative, so Q can never exceed 25 here. A perfectly competitive firm has P = MR, so answering “P above MR” means the structure has been mixed up, and any price found must be below the demand intercept of 100.

05 Independent practice (3 questions)

Question	Answer	What to watch
MR when P = 100 – 2Q	MR = 100 – 4Q	Was the slope doubled?
Output and price when MC = 20	Q = 20, P = 60	Did they substitute back into demand?
Revenue change from a price rise at unit elasticity	No change	Are elasticity and revenue confused?

06 Common mistakes and what to say

Mistake	Student writes	Say this
Using P = MC for a monopoly	Gets Q = 40	“P = MC is the competitive condition; a monopoly uses MR = MC.”
Not doubling the MR slope	Writes MR = 100 – 2Q	“Demand slope is -2, so the MR slope is -4.”
Forgetting fixed cost	Reports profit as 1200	“Fixed cost does not change MC, but it must be deducted from profit.”
Treating monopoly as unlimited pricing	Says “charge whatever they like”	“Demand limits them: a higher price loses customers.”

07 Homework (paper, section and question numbers)

DSE Economics practice paper (firms and market structure) — Section B question 9: MR = MC and profit
Secondary economics chapter index — All chapters

08 Exit check (last 5 minutes)

Question	Answer	Decision
MR when P = 100 – 2Q	MR = 100 – 4Q	Three correct means move on to national income
Profit-maximising price when MC = 20	60	One wrong means reteach MR = MC
Relationship between P and MR under perfect competition	They are equal	Two wrong means restart act one

09 Tutor FAQ

Can a monopolist make a loss?

Yes: if demand lies below the ATC curve the firm loses money and may shut down in the short run.

Why is oligopoly hard to draw?

Firms react to each other, so there is no single demand curve; answers should discuss strategic interaction.

Is price discrimination always harmful?

Not necessarily: if it lets a previously priced-out group buy, total output can rise.

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A TutorZone lesson-prep guide. Written by the TutorZone team; questions and lesson flow are original and are not taken from any school or publisher material.