Date post: | 22-Nov-2014 |
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$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 Curve4. Why when Marginal Revenue = 0 Total Revenues are at their Maximum
$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 Curvethat conforms to the Law of Demand .
We are going to start for the Top Left Hand part of the DemandCurve (“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 QuantitiesOn the TOTAL REVENUE GRAPH just below our Demand Curve Graph
$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 is0.
Total Revenue is $0
$10 X 0 (“Q”)
$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 is1.
Total Revenue is $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
Decrease the Price to $8.00 in order To sell one additional unit.
At $8 the Quantity Demanded is2.
Total Revenue is $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
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 is3.
Total Revenue is $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
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 is4.
Total Revenue is $24
$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 is5.
Total Revenue is $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
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 is6.
Total Revenue is $24
$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 is7.
Total Revenue is $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
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 is8.
Total Revenue is $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
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 is9.
Total Revenue is $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 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 is10.
Total Revenue is $0
$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 is10.
Total Revenue is $0
$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
$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.
Price Decreases
Total Revenues
INCREASE
Price
Dec
reas
esTo
tal R
even
ues
INCR
EASE
$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 INCREASESTotal Revenues DECREASE.
Price Increases
Total Revenues
DECREASE
Price
Incr
ease
sTo
tal R
even
ues
DECR
EASE
$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 Elasticitythis 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
$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”Pr
ice In
crea
ses
Tota
l Rev
enue
s DE
CREA
SE
Using the Total Revenue Test for Elasticitythis 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 ourTotal Revenue Curve.
$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.
Price Decreases
Total Revenues
DECREASE
Price Decreases
Total Revenues
DECREASE
$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. Price Decreases
Total Revenues
DECREASE
Price Decreases
Total Revenues
DECREASE
This corresponds with the RIGHTSide of the Total Revenue Graph.
$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.
Price Increases
Total Revenues
INCREASE
This corresponds with the RIGHTSide of the Total Revenue Graph.
Price Decreases
Total Revenues
DECREASE
$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 Elasticitythis 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 ourTotal Revenue Curve.
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.
$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)
$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)
$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
$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
$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
$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
$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
$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
$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 fillIn the table above BUT I won’t graph thosePoints because they are irrelevant at this point.
$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 ourMarginal Revenue Curve.
KEY POINT: Notice where the MR curve passes throughThe 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
$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”
MRWhen Marginal Revenue (MR) = 0
TOTAL REVENUES ARE AT THEIR MAXIMUM!
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 inorder 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))