Marginal Revenue

7 Key excerpts on "Marginal Revenue"

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  eBook - ePub

  Natural Resources and the Environment

  Economics, Law, Politics, and Institutions

  • Mark Kanazawa(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  it is no longer true that price equals MR .

  The reason has to do with the fact that the monopolist has the market all to himself. Being in the enviable position of servicing the entire market, he experiences something that the small competitive firms did not: as he sells more, the price he is able to charge goes down . This occurs as he moves along the downward-sloping demand curve, as in Figure 2.13 . Suppose he is originally selling the quantity Q0 at the price P0 . If he sells one more unit, the price will fall to P1 . Notice what happens to total revenue: it was originally (P0 X Q0 ), but it is now (Q0 + 1), the new quantity sold, times the new lower price P1 . It is not (Q0 + 1) times the original P0 , which it would have been if the price had remained where it was, at P0 .

  Figure 2.13  

  Marginal Revenue for a monopoly

  So what is the MR, the additional revenue to the monopolist of selling the extra unit? Yes, he is gaining extra revenue on the sale of the extra unit, represented in Figure 2.13 as the shaded area A, which happens to be equal to the price P1 . However, this extra revenue is offset by the lost revenue from having to sell all the units he had previously sold at the price P0 at the new lower price P1 . This lost revenue is the shaded area B. This means that his Marginal Revenue MR is equal to (A – B). So: we have just established that the Marginal Revenue in moving from Q0 to (Q0

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  Intermediate Microeconomics

  • John H Hoag(Author)
  • 2012(Publication Date)
  • WSPC

    (Publisher)

  To make progress toward understanding how this assumption yields results, we need to move forward with our discussion of the general revenue concepts. We will then develop the revenue concepts for competitive firms, which we will then combine with the cost concepts of the previous chapter to obtain profit. Once we have profit, we can move to profit maximization, the shutdown condition, and the firm’s supply curve. Here we go!

  5.2  Revenue Concepts

  In this section, we will develop the revenue concepts that will be used for all firms. When we are done with the general concepts, we will turn to the particular case of the competitive firm and see what the revenue curves look like in this case. We begin with definitions.

  Definition 5.1:  Total revenue (TR) is a relationship between output and dollars showing price, P, times quantity sold, X.

  We can use a formula to find total revenue: TR(X) = P × X.

  Definition 5.2:  Marginal Revenue (MR) is a relationship between output and dollars per unit of output showing the change in total revenue due to a change in output at each level of output.

  We can think of MR in a variety of ways. We can find the MR by using the following formula: . Alternatively, MR is the slope or derivative of TR. You should realize that we can use the fundamental theorem here.

  Exercise 1.  State the fundamental theorem using MR and TR.

  Definition 5.3:  Average revenue (AR) is a relationship between output and dollars per unit of output showing total revenue per unit of output.

  Again, we can use a formula to compute the average revenue: . But there is one more concept we need, and we define it now, even though it is not a revenue concept.

  Definition 5.4:  Profit (π) is a relationship between output and dollars showing the total revenue minus the total cost at each output.

  You can see that profit is a total relationship, as it involves output and dollars, not an average or marginal relationship that involves output and dollars per unit of output. You should also see that the profit could be negative; there is nothing in the definition that guarantees profit is positive. We use the word “profit” for both the case where the profit is positive and the profit is negative. You will also note that we have not defined marginal or average profit. We leave that to you now.

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  eBook - ePub

  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  For example, a producer knows that the 1,000th unit of production will cost 50 pence to produce but will yield 60 pence worth of revenue. So it makes sense to make that unit. The producer knows that the 1,100th unit will cost 59 pence to produce but will yield 60 pence worth of revenue. So it makes sense to make that unit. However, the 1,101st unit will cost 60 pence to produce and will yield 60 pence worth of revenue. So that is the last unit that will be produced. You can see why. The 1,102nd unit may cost 61 pence to produce – so the producer would be making a loss of 1 penny from producing that unit. 4.7  A marginal approach to profit maximizing At the start of this chapter we showed how a business can carry out cost–volume–profit analysis to identify how much profit can be made at different levels of output. What we want to show you now is an approach used by economists to identify the profit maximizing point for a firm. The approach is based on marginal analysis. This analysis involves:

  1. Explaining how Marginal Revenue can be derived from a demand curve.
  2. Explaining the relationship between marginal costs and average costs.
  3. Illustrating how the point at which marginal cost equals Marginal Revenue is the profit maximizing point.

  Deriving average revenue from the demand curve

  In Chapter 3 we saw that a typical demand curve is downward sloping. To sell more goods we have to lower prices.

  Another way of thinking about the demand curve is that it illustrates ‘average revenue’. For example, in Figure 4.10 when the business charges a price of £8 the demand for its product is 600 units. The average revenue for each of these units is therefore £8.

  Figure 4.10   Average revenue = price

  If the business charges a price of £6 the demand for its product is 1,000. The demand curve and average revenue are thus the same. Deriving Marginal Revenue from the demand curve

  In order to increase sales a business needs to lower the price of the units that it sells. As a result the Marginal Revenue generated will always be less than the price the firm is able to charge for the unit sold (because the firm has had to lower the price of all of the units that it sells in order to make additional sales).

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  2024 CFA Program Curriculum Level I Box Set

  • (Author)
  • 2023(Publication Date)
  • Wiley

    (Publisher)

  most likely result would be:

  1. a 10% increase in total revenue.
  2. a 10% increase in average revenue.
  3. a less than 10% increase in total revenue.

  Solution:

  A is correct. In a perfectly competitive market, an increase in supply by a single firm will not affect price. Therefore, an increase in units sold by the firm will be matched proportionately by an increase in revenue.
• The Marginal Revenue per unit sold for a firm doing business under conditions of perfect competition will most likely be:
  1. equal to average revenue.
  2. less than average revenue.
  3. greater than average revenue.
  Solution:

  A is correct. Under perfect competition, a firm is a price taker at any quantity supplied to the market, and AR = MR = Price.
• A profit maximum is least likely to occur when:
  1. average total cost is minimized.
  2. Marginal Revenue is equal to marginal cost.
  3. the difference between total revenue and total cost is maximized.
  Solution:

  A is correct. The quantity at which average total cost is minimized does not necessarily correspond to a profit maximum.
• The short-term breakeven point of production for a firm operating under perfect competition will most likely occur when:
  1. price is equal to average total cost.
  2. Marginal Revenue is equal to marginal cost.
  3. Marginal Revenue is equal to average variable costs.
  Solution:

  A is correct. Under perfect competition, price is equal to Marginal Revenue. A firm breaks even when Marginal Revenue equals average total cost.