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Marginal Revenue Cuvre
• Now we are going to put another layer of complexity over
what we just did.
• Marginal Revenue (“M...
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What we learned
• The Price and Quantity Combinations along a Demand Curve can be used to
calculate Total Revenue (which w...
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Demand Curve, Marginal Revenue Curve, Total Revenue Curve and the Total Revenue Test for Elasticity for a Monopoly.

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Demand Curve, Marginal Revenue Curve, Total Revenue Curve and the Total Revenue Test for Elasticity

Demand Curve, Marginal Revenue Curve, Total Revenue Curve and the Total Revenue Test for Elasticity for a Monopoly.

  1. 1. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity The Purpose of this lesson is to help you understand: 1. How the Total Revenue Curve is derived from the Demand Curve. 2. The Total Revenue Test for Elasticity. 3. The relationship between the Demand Curve and the Marginal Curve 4. Why when Marginal Revenue = 0 Total Revenues are at their Maximum
  2. 2. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity On your left we have a downward sloping Demand Curve that conforms to the Law of Demand . We are going to start for the Top Left Hand part of the Demand Curve (“D*”) and calculate what happens to Total Revenues as we DECREASE the Price of the Good. Total Revenues are calculated by taking the Price X Quantity We will plot the Total Revenues at the given Prices and Quantities On the TOTAL REVENUE GRAPH just below our Demand Curve Graph
  3. 3. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 At $10 the Quantity Demanded is 0. Total Revenue is $0 $10 X 0 (“Q”)
  4. 4. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 Decrease the Price to $9.00 in order To sell one unit. At $9 the Quantity Demanded is 1. Total Revenue is $9
  5. 5. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 Decrease the Price to $8.00 in order To sell one additional unit. At $8 the Quantity Demanded is 2. Total Revenue is $16
  6. 6. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 Decrease the Price to $7.00 in order To sell one additional unit. At $7 the Quantity Demanded is 3. Total Revenue is $21
  7. 7. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 Decrease the Price to $6.00 in order To sell one additional unit. At $6 the Quantity Demanded is 4. Total Revenue is $24
  8. 8. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 Decrease the Price to $5.00 in order To sell one additional unit. At $5 the Quantity Demanded is 5. Total Revenue is $25
  9. 9. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 4 $24 Decrease the Price to $4.00 in order To sell one additional unit. At $4 the Quantity Demanded is 6. Total Revenue is $24
  10. 10. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 Decrease the Price to $3.00 in order To sell one additional unit. At $3 the Quantity Demanded is 7. Total Revenue is $21
  11. 11. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 Decrease the Price to $2.00 in order To sell one additional unit. At $2 the Quantity Demanded is 8. Total Revenue is $16
  12. 12. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 Decrease the Price to $1.00 in order To sell one additional unit. At $1 the Quantity Demanded is 9. Total Revenue is $9
  13. 13. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 Decrease the Price to $0.00 in order To sell one additional unit. At $0 the Quantity Demanded is 10. Total Revenue is $0
  14. 14. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Total Revenue = Price X Quantity Price Quantity Total Revenue (TR) $10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 Decrease the Price to $0.00 in order To sell one additional unit. At $0 the Quantity Demanded is 10. Total Revenue is $0
  15. 15. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” Point “A” is an IMPORTANT POINT. TOTAL REVENUES are MAXIMIZED at Point “A” Price of $5 X Quantity 5 = $25
  16. 16. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” Point “A” is an IMPORTANT POINT. TOTAL REVENUES are MAXIMIZED at Point “A” UP and to the LEFT of Point “A” along the Demand Curve, whenever the Price DECREASED Total Revenues INCREASED.
  17. 17. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” Point “A” is an IMPORTANT POINT. TOTAL REVENUES are MAXIMIZED at Point “A” Inversely, UP and to the LEFT of Point “A” along the Demand Curve, whenever the Price INCREASES Total Revenues DECREASE.
  18. 18. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” Using the Total Revenue Test for Elasticity this is the ELASTIC portion of the Demand Curve. 1. When Price Decreases, Quantity Demanded Increases, Total Revenues INCREASE 2. When Price Increases, Quantity Demanded Decreases, Total Revenues DECREASE
  19. 19. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” Using the Total Revenue Test for Elasticity this is the ELASTIC portion of the Demand Curve. 1. When Price Decreases, Quantity Demanded Increases, Total Revenues INCREASE 2. When Price Increases, Quantity Demanded Decreases, Total Revenues DECREASE On our Total Revenue Graph this Corresponds with the LEFT HALF of our Total Revenue Curve.
  20. 20. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” LETS KEEP GOING! If you got last part then this Part will be EASY. From Point “A”, down and to the RIGHT, as the Price DECREASES the Quantity Demanded INCREASES, BUT the Total Revenues start to DECREASE.
  21. 21. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” LETS KEEP GOING! If you got last part then this Part will be EASY. From Point “A”, down and to the RIGHT, as the Price DECREASES the Quantity Demanded INCREASES, BUT the Total Revenues start to DECREASE. This corresponds with the RIGHT Side of the Total Revenue Graph.
  22. 22. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” NOTE: Along the Lower Right Hand side of the Demand Curve from Point “A” if the Price INCREASES, then Total Revenues INCREASE. This corresponds with the RIGHT Side of the Total Revenue Graph.
  23. 23. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” Using the Total Revenue Test for Elasticity this is the INELASTIC portion of the Demand Curve. 1. When Price Decreases, Quantity Demanded Increases, Total Revenues DECREASE 2. When Price Increases, Quantity Demanded Decreases, Total Revenues INCREASE On our Total Revenue Graphs this Corresponds with the RIGHT HALF of our Total Revenue Curve.
  24. 24. Marginal Revenue Cuvre • Now we are going to put another layer of complexity over what we just did. • Marginal Revenue (“MR”) and Marginal Revenue Curve • Marginal Revenue Curve is going to be separate from the Demand Curve (and the Average Revenue Curve, which is the SAME as the Demand Curve. • Marginal Revenue: The Change in Total Revenue divided by the Change in Quantity.
  25. 25. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity “A” LETS START OVER and Calculate our Marginal Revenue (“MR”) so we can insert the MR curve into this model I will put back up the Demand Schedule we started out with. And you will notice a new column for Marginal Revenue (MR)
  26. 26. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” Marginal Revenue is the Change in Total Revenue divided by the Change In Quantity. Our change in Revenue when we produced our 1st Unit of the good was $9.00. (We went from $0.00 to $9.00)
  27. 27. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” If we plot this point on our graph we will want to plot it BETWEEN Quantity 0 and 1 and at $9.00
  28. 28. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” If we plot this point on our graph we will want to plot it BETWEEN Quantity 1and 2 and at $7.00
  29. 29. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $5 $6 4 $24 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” If we plot this point on our graph we will want to plot it BETWEEN Quantity 2and 3 and at $5.00
  30. 30. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $5 $6 4 $24 $3 $5 5 $25 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” If we plot this point on our graph we will want to plot it BETWEEN Quantity 3and 4 and at $3.00
  31. 31. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $5 $6 4 $24 $3 $5 5 $25 $1 $4 6 $24 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” If we plot this point on our graph we will want to plot it BETWEEN Quantity 4and 5 and at $1.00
  32. 32. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $5 $6 4 $24 $3 $5 5 $25 $1 $4 6 $24 -$1 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” If we plot this point on our graph we will want to plot it BETWEEN Quantity 5and 6 and at $-1.00
  33. 33. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $5 $6 4 $24 $3 $5 5 $25 $1 $4 6 $24 -$1 $3 7 $21 $2 8 $16 $1 9 $9 $0 10 $0 “A” Ok, I THINK you get the point!! I will fill In the table above BUT I won’t graph those Points because they are irrelevant at this point.
  34. 34. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $5 $6 4 $24 $3 $5 5 $25 $1 $4 6 $24 -$1 $3 7 $21 -$3 $2 8 $16 -$5 $1 9 $9 -$7 $0 10 $0 -$9 “A” Now, let’s connect these points and create our Marginal Revenue Curve. KEY POINT: Notice where the MR curve passes through The Horizontal Axis---through Quantity 5 at Price “A” As the Marginal Revenue Curve passes through “5” on Horizontal axis, Marginal Revenue = 0 READ THAT AGAIN!!!! MR
  35. 35. $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 1 2 3 4 5 6 7 8 9 10 $25 $20 $15 $10 $5 $0 1 2 3 4 5 6 7 8 9 10 D* Total Revenue Price Quantity Quantity Price Quantity Total Revenue Marginal Revenue (TR) (MR) $10 0 $0 $9 1 $9 $9 $8 2 $16 $7 $7 3 $21 $5 $6 4 $24 $3 $5 5 $25 $1 $4 6 $24 -$1 $3 7 $21 -$3 $2 8 $16 -$5 $1 9 $9 -$7 $0 10 $0 -$9 “A” MR When Marginal Revenue (MR) = 0 TOTAL REVENUES ARE AT THEIR MAXIMUM!
  36. 36. What we learned • The Price and Quantity Combinations along a Demand Curve can be used to calculate Total Revenue (which we plotted on a separate graph. • Using the TOTAL REVENUE TEST FOR ELASTICITY we determined that the upper half of a linear Demand Curve is relatively ELASTIC – Price Decreases, Quantity Demanded Increases, Total Revenues INCREASE – Price Increases, Quantity Demanded Decreases, Total Revenues DECREASE • Using the TOTAL REVENUE TEST FOR ELASTICITY we determined that the lower half of a linear Demand Curve is relatively INELASTIC – Price Decreases, Quantity Demanded Increases, Total Revenues DECREASE – Price Increases, Quantity Demanded Decreases, Total Revenues INCREASE Using the Total Revenue Data, we calculated and plotted Marginal Revenue. The Marginal Revenue is LESS THAN THE PRICE at each level of production because in order to sell an additional unit of the good we had to lower the price. If we lower the Price on the additional unit then we MUST lower the price on all previous units we sold (assuming the firm cannot PRICE DISCRIMINATE. When Marginal Revenue = 0 then the firm is MAXIMIZING REVENUES (NOT to be confused With Maximizing PROFITS (for the Monopolist))

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