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Economics
Total revenue represents all the company income. Total revenue is calculated by multiplying the price of products with the quantity sold. Typically, total revenue is calculated as follows:
Total revenue = price x quantity
Where price (P) and quantity (Q).
Total revenue=PxQ
As being revealed in Table 1, total revenue is calculated by multiplying price with quantity, when firm produces 2 quantities of goods, firm's total revenue is $10, however, when a firm produces 3 quantities of goods, its total revenue is $15.
Marginal revenue is an additional revenue that a firm generates when a firm sells additional unit of output. The marginal revenue plays an important role in the perfectly competitive firm where a perfectly competitive firm maximizes its profit when marginal revenue is equal to marginal cost. The formula used to calculate marginal revenue is:
Marginal revenue= Change in total revenue/Change quantity.
The average revenue is calculated by dividing the total revenue by the quantity produced.
The table below summarizes a firm's marginal revenue:
Table 1: Total Revenue and Marginal Revenue of a Perfect Competitive Firm ($)
Quantity
Price
Total Revenue
Marginal Revenue
Average revenue
0
5
0
5
0
1
5
5
5
5
2
5
10
5
5
3
5
15
5
5
4
5
20
5
5
5
5
25
5
5
6
5
30
5
5
7
5
35
5
5
8
5
40
5
5
9
5
45
5
5
10
5
50
5
5
Within the perfect competitive market structure, perfect competitive firms are price takers because they have no control of the market and they receive the market price offered to them in the market. In the market competition, there are many firms selling identical products and each firm charges the same market price for the goods sold because a firm has to charge the market price to remain in business. Charging above the market price will make firms to lose its customers and charging below the market price will makes firms to lose profits.
Under perfect competition, the price is constant making firms to earn the same marginal...
As being revealed in Table 1, the price is $5 no matter the quantity sold and increase in the quantity produced will not change the price. Under perfect competition, the total revenue is the quantity produced multiplied by the price and the marginal revenue is constant which is equal to the price.
1b. Fig 1: Total Revenue, Marginal Revenue and Average Revenue of Price Taker firm
Fig 2: Marginal Revenue, Average Revenue and Total revenue of Price fixing Firm
TR
There are fundamental difference between price taker and price fixing firm. Overview the fig 1 reveals that marginal revenue and average revenue are the same and they are equal to price under the perfect competition. On the other hand, the average revenue (AR) and marginal revenue (MR) is downward slope under price fixing firm (See Fig 2). Typically, the price under monopoly (price fixing firm) faces downward slopping market demand curve. While the price of price taker remains constant, the price fixers sell additional units by lowering the price. While the marginal revenue of price taker remains the same with increase in production, the marginal revenue of price fixers declines with increase in the quantity offered to the market.
Moreover, the price is equal to marginal revenue (P=MR) under the price taker, however, the price setter take into account the production level before it sets the price. Thus, marginal revenue is not equal to price under the price setter.
1c. Price elasticity of demand measures the degree of responsiveness of demand as a result of change in price. The formula used to calculate the price elasticity of demand is as follows:
Price elasticity of demand= % Change in Quantity Demand/% Change in Price
Fig 3: Demand curves under elastic and inelastic demand
Elasticity of demand and total revenue for a producer / supplier
Under elastic demand, demand curve is vertical in slope while the demand curve for inelastic demand is downward slope. Typically, under elastic demand curve, a 20% change in price will lead to more than 20% change in demand. However, under inelastic demand, a 20% change in price will make the demand by less than 20% in demand.
2a. Marginal costs are the additional costs needed to produce additional products. On the other hand, average costs are the total costs divided by the total quantity of goods. Marginal cost curve cuts the average costs curve at the lowest point because if the average costs are falling, the costs of producing extra unit of output will be falling. As being illustrated in fig 4, if the average cost is falling the marginal costs will be less than the average costs. Thus, the average costs curve will be above the marginal cost when…
References
Aderton, (1977).Economics. Pearson Education
Sloman, A and Sutcliffe, M (2004). Economics for Business. Prentice Hall.
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