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 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 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 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

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)

Price

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

MR
0 Q

AR

Quantity

The slope of the TR curve is MR

$ Slope at point E = MR E TR

slope =AR

Quantity

The relations between TR, AR and MR

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)

P, AR, MR

AR MR curve curve

AR
Total TR Revenue MUV = DD = P = AR

Quantity

P, AR, MR

AR MR curve curve

AR

Total TR Revenue TR

MUV = DD = P = AR

Quantity

P, AR, MR

AR curve

AR
MR curve MUV = DD = P = AR

Quantity

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 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

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}

REVISION
Single Pricing Arrangement All-or-nothing Pricing Arrangement

AUV

DEMAND AUV = AR

P
DEMAND MUV = AR MUV = MR Q TUV= TEV

MR

Q TUV= TEV + CS

A Price -Searcher = Price-Searchers Market

Price

MR cuts the midpoint of the perpendicular line drawn from the AR to the vertical axis.

MR

AR

Quantity