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Why is the marginal revenue curve the same as its demand curve?
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∙ 10y ago
The marginal revenue curve describes the incremental change in revenue (that is, price*units sold). The MR is not always equivalent to its demand curve. The more perfect competition is, the closer demand approaches the MR. This is because, in perfect competition, firms sell at the MC = MR = P criterion. In the opposite case, monopoly, MR always lies under of demand, and firms achieve monopoly profits by choosing a production quantity where MC = MR and charging a price mark-up.
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∙ 10y ago
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Why is the demand curve the same as the marginal revenue curve for a perfectly competitive firm?
Because for a perfectly competetive firm since the demand curve is perfectly elastic even a slightest price change doesnt add any further demand..so there is no change in marinal revenue also.Since revenue is demand multiplied with cost of unit..the two curves are same.
In a monopoly why is the marginal revenue curve always below the demand curve?
because price and output are related by the demand function in a monopoly. it is the same thing to choose optimal price or to choose the optimal output. even though the monopolist is assumed to set price and consumers choose quantity as a function of price, we can think of the monopolist as choosing the optimal quantity it wants consumers to buy and then setting the corresponding price. OR in simpler terms Because AR (demand) is downward sloping - (see equi-marginal rule or Law of Equi-Marginal Utility). To sell one more unit of output, the firm must lower its price, meaning that the revenue received is less than that received for the previous unit (marginal revenue received for unit 2 is less than that for unit 1). Therefor the marginal revenue will be less than the average revenue. Unit 1 sold for $5 Marginal revenue=$5 Average Revenue=$5 Unit 2 sold for $4 Marginal revenue=$4 Average Revenue=$4.50 ($5+$4/2)
Why is the marginal revenue curve below the demand curve and why does the vertical distance between them diverge as output increases?
The demand curve is a tremendously useful illustration for those who can read it. We have seen that the downward slope tells us that there is an inverse relationship between price and quantity. One can also view the demand curve as separating a region in which sellers can operate from a region forbidden to them. But there is more, especially when one considers what an area on the graph represents. If people will buy 100 units of a product when its price is $10.00, as the picture below illustrates, total revenue for sellers will be $1000. Simple geometry tells us that the area of the rectangle formed under the demand curve in the picture is found by multiplying the height of the rectangle by its width. Because the height is price and the width is quantity, and since price multiplied by quantity is total revenue, the area is total revenue. The fact that area on supply and demand graphs measures total revenue (or total expenditure by buyers, which is the same thing from another viewpoint) is a key idea used repeatedly in microeconomics. From the demand curve, we can obtain total revenue. From total revenue, we can obtain another key concept: marginal revenue. Marginal revenue is the additional revenue added by an additional unit of output, or in terms of a formula: Marginal Revenue = (Change in total revenue) divided by (Change in sales) According to the picture, people will not buy more than 100 units at a price of $10.00. To sell more, price must drop. Suppose that to sell the 101st unit, the price must drop to $9.95. What will the marginal revenue of the 101st unit be? Or, in other words, by how much will total revenue increase when the 101st unit is sold? There is a temptation to answer this question by replying, "$9.95." A little arithmetic shows that this answer is incorrect. Total revenue when 100 are sold is $1000. When 101 are sold, total revenue is (101) x ($9.95) = $1004.95. The marginal revenue of the 101st unit is only $4.95. To see why the marginal revenue is less than price, one must understand the importance of the downward-sloping demand curve. To sell another unit, sellers must lower price on all units. They received an extra $9.95 for the 101st unit, but they lost $.05 on the 100 that they were previously selling. So the net increase in revenue was the $9.95 minus the $5.00, or $4.95. There is a another way to see why marginal revenue will be less than price when a demand curve slopes downward. Price is average revenue. If the firm sells 100 for $10.00, the average revenue for each unit is $10.00. But as sellers sell more, the average revenue (or price) drops, and this can only happen if the marginal revenue is below price, pulling the average down. The reasoning of why marginal will be below average if average is dropping can perhaps be better seen in another example. Suppose that the average age of 20 people in a room is 25 years, and that another person enters the room. If the average age of the people rises as a result, the extra person must be older than 25. If the average age drops, the extra person must be younger than 25. If the added person is exactly 25, then the average age will not change. Whenever an average is rising, its marginal must be above the average, and whenever an average is falling, its marginal must be below the average. If one knows marginal revenue, one can tell what happens to total revenue if sales change. If selling another unit increases total revenue, the marginal revenue must be greater than zero. If marginal revenue is less than zero, then selling another unit takes away from total revenue. If marginal revenue is zero, than selling another does not change total revenue. This relationship exists because marginal revenue measures the slope of the total revenue curve. The picture above illustrates the relationship between total revenue and marginal revenue. The total revenue curve will be zero when nothing is sold and zero again when a great deal is sold at a zero price. Thus, it has the shape of an inverted U. The slope of any curve is defined as the rise over the run. The rise for the total revenue curve is the change in total revenue, and the run is the change in output. Therefore, Slope of Total Revenue Curve = (Change in total revenue) / (Change in amount sold) But this definition of slope is identical to the definition of marginal revenue, which demonstrates that marginal revenue is the slope of the total revenue curve.
What is the distinction between marginal revenue product and marginal revenue?
I'm thinking that marginal revenue product is the marginal revenue on one product, and marginal revenue is the marginal revenue on the whole firm sales... I'm wondering the same thing but the above response is incorrect. both terms imply values on one item as indicated by the "marginal"
Saying the marginal costs are greater than the marginal benefits is the same as saying?
Marginal costs and marginal benefits are discussing the conditions for profit maximization. This statement can only have further explanation if it is clarified under circumstantial economic conditions. One of the conditions is that the firm is not a monopoly and that there is competition that keeps the price of the good at a single price. Another condition is that there are diminishing returns to labor and production. This means that resources are scarce for production so it becomes more costly to produce more because there are more constraints to resources and there is a limited labor skill pool. In a competitive market the wage is also assumed to be equal for everyone who is employed to do the same job. Thus, if the marginal costs are greater than the marginal benefits then the profit maximizing equation for a firm or individual is not in balance. The profit maximizing condition for a firm or individual is marginal costs equal marginal benefits. For example in the context of a firm, the marginal costs of producing is the wage it must pay to each extra worker it hires and the benefits are the goods that the worker produces for the firm to sell. Assuming that all workers are given the same wage, the firm should hire as many workers until the marginal revenue the worker produces (Marginal product*price) is equal to the wage. This implies price important because price determines how much revenue the worker makes from the product. If the firm is producing where marginal cost is above marginal benefit the firm is losing money and should get rid of some workers. If the firm has control over the price, like in a monopoly, then the profit maximization condition is a little different. In the case of a monopoly the demand curve is not the same as the marginal revenue curve. This is because in a monopoly the firm has to decrease price in order to sell more of the good because they are the only supplier. Marginal revenue is derived from the demand but the profit maximization condition is still marginal cost equals marginal benefits but marginal benefits does not equal the demand curve.
Why is the demand curve the same as the marginal revenue curve for a perfectly competitive firm?
Because for a perfectly competetive firm since the demand curve is perfectly elastic even a slightest price change doesnt add any further demand..so there is no change in marinal revenue also.Since revenue is demand multiplied with cost of unit..the two curves are same.
In a monopoly why is the marginal revenue curve always below the demand curve?
because price and output are related by the demand function in a monopoly. it is the same thing to choose optimal price or to choose the optimal output. even though the monopolist is assumed to set price and consumers choose quantity as a function of price, we can think of the monopolist as choosing the optimal quantity it wants consumers to buy and then setting the corresponding price. OR in simpler terms Because AR (demand) is downward sloping - (see equi-marginal rule or Law of Equi-Marginal Utility). To sell one more unit of output, the firm must lower its price, meaning that the revenue received is less than that received for the previous unit (marginal revenue received for unit 2 is less than that for unit 1). Therefor the marginal revenue will be less than the average revenue. Unit 1 sold for $5 Marginal revenue=$5 Average Revenue=$5 Unit 2 sold for $4 Marginal revenue=$4 Average Revenue=$4.50 ($5+$4/2)
Why is the marginal revenue curve below the demand curve and why does the vertical distance between them diverge as output increases?
The demand curve is a tremendously useful illustration for those who can read it. We have seen that the downward slope tells us that there is an inverse relationship between price and quantity. One can also view the demand curve as separating a region in which sellers can operate from a region forbidden to them. But there is more, especially when one considers what an area on the graph represents. If people will buy 100 units of a product when its price is $10.00, as the picture below illustrates, total revenue for sellers will be $1000. Simple geometry tells us that the area of the rectangle formed under the demand curve in the picture is found by multiplying the height of the rectangle by its width. Because the height is price and the width is quantity, and since price multiplied by quantity is total revenue, the area is total revenue. The fact that area on supply and demand graphs measures total revenue (or total expenditure by buyers, which is the same thing from another viewpoint) is a key idea used repeatedly in microeconomics. From the demand curve, we can obtain total revenue. From total revenue, we can obtain another key concept: marginal revenue. Marginal revenue is the additional revenue added by an additional unit of output, or in terms of a formula: Marginal Revenue = (Change in total revenue) divided by (Change in sales) According to the picture, people will not buy more than 100 units at a price of $10.00. To sell more, price must drop. Suppose that to sell the 101st unit, the price must drop to $9.95. What will the marginal revenue of the 101st unit be? Or, in other words, by how much will total revenue increase when the 101st unit is sold? There is a temptation to answer this question by replying, "$9.95." A little arithmetic shows that this answer is incorrect. Total revenue when 100 are sold is $1000. When 101 are sold, total revenue is (101) x ($9.95) = $1004.95. The marginal revenue of the 101st unit is only $4.95. To see why the marginal revenue is less than price, one must understand the importance of the downward-sloping demand curve. To sell another unit, sellers must lower price on all units. They received an extra $9.95 for the 101st unit, but they lost $.05 on the 100 that they were previously selling. So the net increase in revenue was the $9.95 minus the $5.00, or $4.95. There is a another way to see why marginal revenue will be less than price when a demand curve slopes downward. Price is average revenue. If the firm sells 100 for $10.00, the average revenue for each unit is $10.00. But as sellers sell more, the average revenue (or price) drops, and this can only happen if the marginal revenue is below price, pulling the average down. The reasoning of why marginal will be below average if average is dropping can perhaps be better seen in another example. Suppose that the average age of 20 people in a room is 25 years, and that another person enters the room. If the average age of the people rises as a result, the extra person must be older than 25. If the average age drops, the extra person must be younger than 25. If the added person is exactly 25, then the average age will not change. Whenever an average is rising, its marginal must be above the average, and whenever an average is falling, its marginal must be below the average. If one knows marginal revenue, one can tell what happens to total revenue if sales change. If selling another unit increases total revenue, the marginal revenue must be greater than zero. If marginal revenue is less than zero, then selling another unit takes away from total revenue. If marginal revenue is zero, than selling another does not change total revenue. This relationship exists because marginal revenue measures the slope of the total revenue curve. The picture above illustrates the relationship between total revenue and marginal revenue. The total revenue curve will be zero when nothing is sold and zero again when a great deal is sold at a zero price. Thus, it has the shape of an inverted U. The slope of any curve is defined as the rise over the run. The rise for the total revenue curve is the change in total revenue, and the run is the change in output. Therefore, Slope of Total Revenue Curve = (Change in total revenue) / (Change in amount sold) But this definition of slope is identical to the definition of marginal revenue, which demonstrates that marginal revenue is the slope of the total revenue curve.
What is the distinction between marginal revenue product and marginal revenue?
I'm thinking that marginal revenue product is the marginal revenue on one product, and marginal revenue is the marginal revenue on the whole firm sales... I'm wondering the same thing but the above response is incorrect. both terms imply values on one item as indicated by the "marginal"
Saying the marginal costs are greater than the marginal benefits is the same as saying?
Marginal costs and marginal benefits are discussing the conditions for profit maximization. This statement can only have further explanation if it is clarified under circumstantial economic conditions. One of the conditions is that the firm is not a monopoly and that there is competition that keeps the price of the good at a single price. Another condition is that there are diminishing returns to labor and production. This means that resources are scarce for production so it becomes more costly to produce more because there are more constraints to resources and there is a limited labor skill pool. In a competitive market the wage is also assumed to be equal for everyone who is employed to do the same job. Thus, if the marginal costs are greater than the marginal benefits then the profit maximizing equation for a firm or individual is not in balance. The profit maximizing condition for a firm or individual is marginal costs equal marginal benefits. For example in the context of a firm, the marginal costs of producing is the wage it must pay to each extra worker it hires and the benefits are the goods that the worker produces for the firm to sell. Assuming that all workers are given the same wage, the firm should hire as many workers until the marginal revenue the worker produces (Marginal product*price) is equal to the wage. This implies price important because price determines how much revenue the worker makes from the product. If the firm is producing where marginal cost is above marginal benefit the firm is losing money and should get rid of some workers. If the firm has control over the price, like in a monopoly, then the profit maximization condition is a little different. In the case of a monopoly the demand curve is not the same as the marginal revenue curve. This is because in a monopoly the firm has to decrease price in order to sell more of the good because they are the only supplier. Marginal revenue is derived from the demand but the profit maximization condition is still marginal cost equals marginal benefits but marginal benefits does not equal the demand curve.
Is individual demand curve and market demand curve same for identical consumers?
NO
How is a demand curve similar to a demand schedule?
The demand curve and schedule state the same information as each other.
How is a a demand curve similar to a demand schedule?
The demand curve and schedule state the same information as each other.
Why price rigidity in oligopoly firm?
Kinked demand curve theoryThis was developed in the late 1930s by the American Paul Sweezy. The theory aims to explain the price rigidity that is often found in oligopolistic markets. It assumes that if an oligopolist raises its price its rival will not follow suit, as keeping their prices constant will lead to an increase in market share. The firm that increased its price will find that revenue falls by a proportionately large amount, making this part of the demand curve relatively elastic (flatter).Conversely if an oligopolist lowers its price, its rivals will be forced to follow suit to prevent a loss of market share. Lowering price will lead to a very small change in revenue, making this part of the demand curve relatively inelastic (steeper).The firm then has no incentive to change its price, as it will lead to a decreasein the firm's revenue. This causes the demand curve to kink around the present market price. Prices will further stabilize as the firm will absorb changes in its costs as can be seen in the diagram below. The marginal revenue jumps (vertical discontinuity) at the quantity where the demand curve kinks, the marginal cost could change greatly - e.g., MC1 to MC2 (between prices a and b)- and the profit maximizing level of output remains the same.
Why average revenue curve of a firm under perfect competition is a horizontal line?
Since a firm in a perfectly competitive market is a passive price taker, the demand curve for the individual firm is a horizontal line. This means that the firm receives the same price for any level of output. This therefore means that Margincal Revenue curve and Average revenue curve is the same as the demand curve. D=P=MR=AR For example, the price facing a particular firm (perfectly competitive) is $2. If the firm sells two pens it receives a total revenue of $4, if it sells 3 pens, then $6 and so on. $4/$2=2 $6/$2=2
The demand curve any monopolist uses in making output decisions is?
the same as the market demand curve.
Is demand needed in equilibrium?
Yes. Equilibrium is created at the intersection of the Demand curve and Supply Curve. Equilibrium can be shifted if the Demand curve increases or decreases, and the same happens when the Supply curve increases or decreases. Without demand, you would just have a Supply curve.
