Supply and demand and marginal revenue
I'll do it later with calculus to show that it is a very good approximation.
Find the demand function for the marginal revenue function
At a price of 0, the quantity demanded is 10; the marginal revenue curve passes through 5 units at this point. It appears in Figure 4 as the area of a rectangle whose bottom left corner is the origin and top right corner is a point on the demand curve. Now the firm receives less for the first 2 units. This is why several drug manufacturers greatly increased their prices recently, to take advantage of inelastic demand for their products. By Robert J. Demand only increases with decreasing prices, but the marginal revenue gained by selling one additional unit will always be less than the price of that unit because the monopolist will have to sell all its units at the lower price. We get 5. These, I'm going to approximate. What they are referring to is the absolute value of the elasticity of demand. But a monopoly firm can sell an additional unit only by lowering the price. The inverse demand function is the form of the demand function that appears in the famous Marshallian Scissors diagram. This is actually generalizable. At quantity zero, the marginal revenue is equal to the priceselling the first unit adds one times the price of that unit to the total revenue.
We can even see that by approximating the slope between the slope between these two points. As always,we follow the convention of plotting marginal values at the midpoints of the intervals.
At every quota level the Board's problem is to decide whether to increase the output quota by one unit. More production after that point will cause total revenue to decline.
To think about marginal revenue, marginal revenue is just how much does our total revenue change, given some change in our quantity. The vertical axis measures price and the horizontal axis measures output of wheat.
Right at that point, the slope is 0, and then right past it, it becomes barely negative. The marginal revenue is given by the thick line in Figure 6.
The marginal revenue curve thus crosses the horizontal axis at the quantity at which the total revenue is maximum. The best way to find the slope right over here is say how much does my total revenue change if I have a very small change in quantity?
Now, let's think about the marginal revenue when our quantity is 2. Past the mid-point of a straight line demand curve, the marginal revenue becomes negative.
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