Economics – marginal revenue
International Business School
Hanze University of Applied Sciences, The Netherlands
Learning objectives
– Understand the concept of marginal revenue
– Calculate the marginal revenue from given data
6-5-2015
Marginal revenue
2
Marginal analysis
• Last week:
– firms are trying to maximize their profit
– firms will increase production as long as the marginal cost are
below the average cost per unit
• This week: marginal revenue
costs of
increasing
production
6-5-2015
Marginal revenue
benefit
⇒ As long as the benefits outweigh
the costs, the firm will increase
production up to the point where the
costs of increasing production
outweigh the benefit.
3
Examples
50 Euro
75 Euro
I.
6-5-2015
The costs of producing one more product are € 50. This product
can be sold for € 75.
• 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
• 75 − 50 = 25 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 → 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
• additional profit of selling one more unit.
Marginal revenue
4
Examples
80 Euro
50 Euro
I.
6-5-2015
The costs of producing one more product are € 80. This product
can be sold for € 50.
• 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 = 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 − 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
• 50 − 80 = −30 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 → 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿
• additional loss of selling one more unit.
Marginal revenue
5
Examples
As long as the revenue of producing one more unit
exceeds the costs, firms will increase production.
6-5-2015
Marginal revenue
6
Calculating marginal revenue
price
quantity
total revenue
demanded
(TR)
5
200
4
275
3
350
2
500
6-5-2015
Marginal revenue
average revenue
(AR)
marginal revenue
(MR)
7
Calculating marginal revenue
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 ∗ 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 = 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
price
𝑃𝑃 ∗ 𝑄𝑄 = 𝑇𝑇𝑇𝑇
quantity
total revenue
demanded
(TR)
5
200
1000
4
275
1100
3
350
1050
2
500
1000
6-5-2015
Marginal revenue
average revenue
(AR)
marginal revenue
(MR)
8
Calculating marginal revenue
price
𝑃𝑃 ∗ 𝑄𝑄 = 𝑇𝑇𝑇𝑇
quantity
total revenue
demanded
(TR)
𝑇𝑇𝑇𝑇
𝐴𝐴𝐴𝐴 =
𝑄𝑄
average revenue
(AR)
5
200
1000
5
4
275
1100
4
3
350
1050
3
2
500
1000
2
6-5-2015
Marginal revenue
𝑃𝑃 ∗ 𝑄𝑄
𝐴𝐴𝐴𝐴 =
= 𝑅𝑅
𝑄𝑄
marginal revenue
(MR)
9
Calculating marginal revenue
price
5
𝑃𝑃 ∗ 𝑄𝑄 = 𝑇𝑇𝑇𝑇
quantity
total revenue
demanded
(TR)
200
1000
𝑇𝑇𝑇𝑇
𝐴𝐴𝐴𝐴 =
𝑄𝑄
average revenue
(AR)
275
1100
4
3
350
1050
3
2
500
1000
2
Marginal revenue
Δ𝑇𝑇𝑇𝑇
𝑀𝑀𝑀𝑀 =
Δ𝑄𝑄
marginal revenue
(MR)
5
4
6-5-2015
𝑃𝑃 ∗ 𝑄𝑄
𝐴𝐴𝐴𝐴 =
= 𝑅𝑅
𝑄𝑄
1100 − 1000
75
10
Calculating marginal revenue
price
5
𝑃𝑃 ∗ 𝑄𝑄 = 𝑇𝑇𝑇𝑇
quantity
total revenue
demanded
(TR)
200
1000
𝑇𝑇𝑇𝑇
𝐴𝐴𝐴𝐴 =
𝑄𝑄
𝑃𝑃 ∗ 𝑄𝑄
𝐴𝐴𝐴𝐴 =
= 𝑅𝑅
𝑄𝑄
average revenue
(AR)
Δ𝑇𝑇𝑇𝑇
𝑀𝑀𝑀𝑀 =
Δ𝑄𝑄
marginal revenue
(MR)
5
1.33
4
275
1100
4
-0.66
3
350
1050
3
-0.33
2
500
1000
2
Firms maximize their revenue if the MR = 0.
6-5-2015
Marginal revenue
11
To be continued
You will learn the “Economic Profit” in the coming
part.
6-5-2015
12