###### Asked in Business & FinanceEconomicsBusiness and Industry

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Business and Industry

# Why marginal revenue curve is twice as steep as demand curve in various market structure?

## Answer

###### Wiki User

###### December 29, 2009 3:52PM

## The calculus-free answer

Think of the effect incremental increases in quantity have on total revenue. Make a simple graph with a demand curve and draw boxes representing total revenue. Notice how the total area of the box (representing the total revenue) varies as quantity increases. With a linear demand curve, as you move down the curve the box becomes larger and larger in area until you reach the curve's midpoint. This means that the MR up to this point was positive because TR was increasing. After this point the area of the box declines, this means that from this point forward the MR is negative because TR is decreasing. This is why the MR curve hits zero at half the quantity the demand curve hits zero. Hope this helps.-DVE

## Related Questions

###### Asked in Economics

### If marginal revenue is less than average revenue will the demand curve be downward sloping?

This question reflects a fundamental misunderstanding of supply
and demand. Marginal revenue and average revenue are related to a
firm's cost function, and are thus connected to SUPPLY. They have
nothing to do with a demand curve in classical economics, which is
the marginal benefit to the CONSUMER of being in the market.

###### Asked in Economics

### How do you achieve the profit-maximizing price?

Profit-maximizing price is found at the quantity where MR=MC,
marginal revenue=marginal cost. You will have to graph both
marginal revenue and marginal cost and find the point of
intersection. That is the profit-max quantity, but then you will
have to find its corresponding price. In perfect competition,
price=marginal revenue, which is constant, but in an imperfect
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quantity and find the corresponding price from the demand
curve.

###### Asked in Economics

### Why does a Perfect Competition firms demand curve is also its marginal revenue curve?

Answer
For a perfectly competitive firm with no market control, the
marginal revenue curve is a horizontal line. Because a perfectly
competitive firm is a price taker and faces a horizontal demand
curve, its marginal revenue curve is also horizontal and coincides
with its average revenue (and demand) curve.
Yes - what you must remember is that a firm's demand curve in
perfect competition is its average revenue curve. Average revenue =
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Because there are so many sellers in the market, no one firm has
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###### Asked in Economics

### 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)

###### Asked in Economics

### The demand curve for a monopolist differs from the demand curve faced by a competitive firm?

The pure monopolist's market situation differs from that of a
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Barriers to entry may permit a monopolist to acquire economic
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###### Asked in Jobs & Education

### Why MR curve is always half of demand curve explain graphically?

Marginal Revenue is the derivate (rate of change) of total
revenue. Total revenue is = Price x Quantity. For instance, if the
demand curve was Q = 100 - P, find the inverse demand (P = 100 -
Q). Total Revenue = 100Q-Q^2
Therefore marginal revenue is the derivative of 100Q - Q^2.
MR = 100 - 2Q (thus twice the negative slope).
In short: inverse demand x Q, find the derivative.
Source(s):
Microeconomic Theory Class

###### Asked in Economics

### Why is the marginal revenue curve the same as its demand curve?

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.

###### Asked in Business & Finance, Economics, Business and Industry

### 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.

###### Asked in Economics

### What is the relationship in price and marginal revenue for price setters?

The marginal revenue of selling an additional unit of output for
a price setter (hence within an imperfect market) is always less
than market price.
Picture a downwards sloping market demand curve (hence
individual monopolies demand curve); at P=6, Q=2, and at P=5, Q=3.
To sell an additional unit of output, the firm must drop price from
6 to 5, meaning the total revenue will increase from (6x2)=12 to
(5x3)=15. This increase in revenue (marginal revenue) is $3. Note
$3 is not only smaller than the original price, but than the new
price as well.
Hence, price is always greater than marginal revenue for a price
setter.