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The Relationship Between
Total and Marginal Values
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Total Values Total Revenue is price x
Cost/Revenue quantity sold. (TR = P x Q)
The slope of the TR curve
A firm facing a downward
varies atdemand curve is
sloping each point. This
because the amount added
must lower price to sell
to TR from each sale is
successive units of its
slightly less than before.
product. TR therefore rises
A positive slope suggests
at first but the rate at
TR is rising, abegins to
which it rises negative
slopedownTR is will
slow that and falling.
eventually fall.
TR
Output/Sales
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At Total= TR the slope of
Profit point – TC is the
this Cost (TC)
the TR of fixed costs are
sum and TC curves
Maximum profit will be
equal. At this point MC =
(FC) and variable
Cost/Revenue made where the
TC MR since(VC).and MR are
costs MC
the slopes between TR
distance of the TR and
and TC are at their
TC = FC + VC
TC curves. (Students of
greatest.
calculus should recognise
It cuts the vertical axis
this!) a point indicating
at
Hencelevel of fixed costs.
the profit maximisation
occurs where MC = MR.
FC
TR
Output/Sales
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Total and Marginal Values
Price At the pointnormal conditions,
Marginal Revenue (MR) is
Under where the MR cuts
the horizontalto TR MRa=result
thethe demand curve facing
addition axis, as O.
Thatthe firm is downwardof to
of selling one extra unit
means that the addition
TR from If the Done extra unit
output. selling curve is
sloping from left to right.
Ped = -1 was This implies thateach unit
downward sloping, to sell for
0. This is the definition
unitsold atelasticity of of a
is increasing items demand.
price a progressively
lower price.a firmMR curve
product The must
Therefore the equivalent point
liesaccept the D(AR) curve.
under a lower price for
on the D curve is where Ped =
each successive unit.
-1
AR = TR/Q. The area
under the curve
represents TR
D = AR
Sales
MR
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Total and Marginal Values
Price
It follows that when MR is
When price elasticity of
Ped in this range negative,is elastic, the to TR
demand the addition %
must bein Qd is > % this is the
is between infinity change negative. If change in
case such a reduction in price
P. In then circumstances, a
and -1 by 10% would lead to Qd rising
reduction in price of 10%
by less than 10% meaning TR
would see D rising by more
would fall. and TR would rise.
than 10%
The addition to TR must the
Elasticity in this range of
thereforecurve must therefore
demand be positive shown by
thebetween infinity and the or
be highlighted area on -1 MR
curve.
elastic.
D = AR
Sales
MR
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Total and Marginal Values
Price When MR is negative, the
addition to TR must be
negative. If this is the case then
a reduction in price by 10%
would lead to Qd rising by less
than 10% meaning TR would
fall.
Elasticity in this range of the
demand curve must therefore
be between 0 and -1 - inelastic
Ped in this range
is between 0 and -1
D = AR
Sales
MR
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Cost / Revenue
TC
Putting the two together:
If a firm was to target revenue
maximisation as an objective,
this wouldthe two diagrams
If we put not necessarily
correlate withcan see that profit
together we the profit
maximising output – revenuethe
maximisation occurs where
maximisation occursTR andTR
difference between where TC
is at a maximum (MR = = MR)
is greatest (where MC 0)
TR
Output/Sales
MC
D = AR
Output/Sales
Q1 Q2
MR
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