Demand Curve, Marginal Revenue Curve, Total Revenue Curve and the Total Revenue Test for Elasticity for a Monopoly

$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



$10 0 $0 $9 1 $9

Decrease the Price to $9.00 in order To sell one unit.


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



$10 0 $0 $9 1 $9 $8 2 $16

Decrease the Price to $8.00 in order To sell one additional unit.


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



$10 0 $0 $9 1 $9 $8 2 $16 $7 3 $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



$10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $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



$10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24$5 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



$10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24$5 5 $25$4 4 $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



$10 0 $0 $9 1 $9 $8 2 $16 $7 3 $21 $6 4 $24$5 5 $25$4 6 $24$3 7 $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



$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




$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



$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



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



$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



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



$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



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”


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”


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


$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


$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


$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”



$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


$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”



$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


$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”



$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


$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


$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


$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


$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))

Education

Demand Curve, Marginal Revenue Curve, Total Revenue Curve and the Total Revenue Test for Elasticity for a Monopoly