Total Revenue, Average Revenue and Marginal Revenue

1
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

2
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

3
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 TRP x Q, then AR P for
  single pricing practice
• And since MUV DD P, then
• MUV DD P AR

4
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

5
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 lt P) Why? (Hint
  MRltAR, ARP for single pricing)

6
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
Q
0
Quantity
7
The slope of the TR curve is MR
The relations between TR, AR and MR
8
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)

9
P, AR, MR

AR curve
MR curve
AR
Total Revenue
TR
MUV DD P AR
Quantity
Q
10
P, AR, MR

AR curve
MR curve
AR
Total Revenue
TR
TR
MUV DD P AR
Quantity
Q
11
P, AR, MR

AR curve
AR
MR curve
MUV DD P AR
Quantity
Q
12
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.

13
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 gt MUV , and
  also downward-sloping

14
Revision on different pricing arrangement

• Single Pricing Arrangement
• with Consumer Surplus TUV - TEV
• MUV DD AR P gtMR ltAUV
• 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 gtMUV

15
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
16
A Price -Searcher Price-Searchers Market
MR cuts the midpoint of the perpendicular line
drawn from the AR to the vertical axis.
Price
AR
MR
Quantity