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Total Revenue, Average Revenue and Marginal Revenue. Wealth-maximizing Each seller has sufficient market power to set the selling price higher and sell less OR set the selling price lower and sell more The demand curve facing the price searcher is downward sloping.

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total revenue average revenue and marginal revenue
Total Revenue, Average Revenue and Marginal Revenue
  • Wealth-maximizing
  • Each seller has sufficient market power to set the selling price higher and sell less OR set the selling price lower and sell more
  • The demand curve facing the price searcher is downward sloping
total revenue average revenue and marginal revenue2
Total Revenue, Average Revenue and Marginal Revenue
  • Total revenue ( TR ) is the total amount of money(or some other good) that a firm receives from the sale of its goods. It the firm practices single pricing rather than price discrimination, TR = total expenditure of the consumer = P x Q
total revenue average revenue and marginal revenue3
Total Revenue, Average Revenue and Marginal Revenue
  • Average revenue ( AR ) is the total amount of money(or some other good) that a firm receives from the sale divided by the number of units of goods sold.
  • AR = TR/Q, since TR=P x Q, then AR = P for single pricing practice
  • And since MUV = DD = P, then
  • MUV = DD = P = AR
total revenue average revenue and marginal revenue4
Total Revenue, Average Revenue and Marginal Revenue
  • Marginal revenue ( MR ) is the change in total revenue resulting from selling an extra unit of goods.
  • MR = TR/Q, where TR = change in TR due to change in Q, Q = change in Q
to find t r from the m r curve
To find T R from the M R curve
  • For a certain known quantity transacted, the area under the MR and above the horizontal axis is the T R . (I.e. the sum of the Marginal Revenues of all units of goods.)
  • The slope of the TR curve is MR. Why?
  • And, MR is always smaller Price for single pricing arrangement (I.e. MR < P) Why? (Hint MR<AR, AR=P for single pricing)
slide6

For a certain known quantity transacted, the area under the MR and above the horizontal axis is the T R .

(I.e. the sum of the Marginal Revenues of all units of goods, I.e. area 0ACQ)

Also, TR = AR x Q, I.e. area 0PBQ

Price

A

B

P

C

AR

MR

0

Q

Quantity

slide7

$

Slope at point E = MR

TR

E

slope =AR

0

Quantity

The slope of the TR curve is MR

The relations between TR, AR and MR

total revenue average revenue and marginal revenue8
Total Revenue, Average Revenue and Marginal Revenue
  • The slope of Marginal revenue ( MR ) is twice the slope of AR.
  • Why? (See next slide)
  • (The relations between TR, AR and MR can also be applied to TUV, AUV and MUV)
slide9

P, AR, MR

=

AR curve

MR curve

AR

Total

Revenue

TR

MUV = DD = P = AR

Q

Quantity

slide10

P, AR, MR

=

AR curve

MR curve

AR

Total

Revenue

TR

TR

MUV = DD = P = AR

Q

Quantity

slide11

P, AR, MR

=

AR curve

AR

MR curve

MUV = DD = P = AR

Q

Quantity

total revenue average revenue and marginal revenue12
Total Revenue, Average Revenue and Marginal Revenue
  • The areas of the 2 triangles must be the same for total revenue should be the same.
  • The two triangles must be the same only if the MR cuts the midpoint of the perpendicular line drawn from the DD to the vertical axis.
  • Hence, the slope of Marginal revenue ( MR ) is twice the slope of AR.
the relationship between ar and mr
The relationship between AR and MR
  • The slope of MR is twice the slope of AR
  • MR curve is not the demand curve (the relationship between price and quantity).
  • However, if the price searcher practises price discrimination or All-or-Nothing Pricing Arrangement, then All-or-nothing pricing =
  • All-or-nothing DD = AUV , which is > MUV , and also downward-sloping
revision on different pricing arrangement
Revision on different pricing arrangement
  • Single Pricing Arrangement
  • with Consumer Surplus = TUV - TEV
  • MUV = DD = AR = P [>MR] {<AUV}
  • All-or-Nothing Pricing Arrangement
  • All consumer surplus will be extracted, so that TUV = TEV
  • hence, All-or-Nothing DD curve = All-or-nothing pricing = AUV {>MUV}
slide15

REVISION

Single Pricing Arrangement

All-or-nothing Pricing Arrangement

DEMAND

AUV

AUV

= AR

P

P

DEMAND

MUV

= MR

MUV

= AR

MR

Q

Q

TUV= TEV

TUV= TEV + CS

slide16

A Price -Searcher = Price-Searcher’s Market

MR cuts the midpoint of the perpendicular

line drawn from the AR to the vertical axis.

Price

AR

MR

Quantity