The Relationship Between Total and Marginal Values.ppt

The Relationship Between Total and Marginal Values * ed.co.uk Copyright 2006 – Biz/ed Total Values Cost/Revenue Output/Sales TR Total Revenue is price x quantity sold. (TR = P x Q) A firm facing a downward sloping demand curve must lower price to sell successive units of its product. TR therefore rises at first but the rate at which it rises begins to slow down and will eventually fall. The slope of the TR curve varies at each point. This is because the amount added to TR from each sale is slightly less than before. A positive slope suggests TR is rising, a negative slope that TR is falling. Cost/Revenue Output/Sales TR TC Total Cost (TC) is the sum of fixed costs (FC) and variable costs (VC). TC = FC + VC It cuts the vertical axis at a point indicating the level of fixed costs. Profit = TR – TC Maximum profit will be made where the distance between TR and TC are at their greatest. At this point the slope of the TR and TC curves are equal. At this point MC = MR since MC and MR are the slopes of the TR and TC curves. (Students of calculus should recognise this!) Hence profit maximisation occurs where MC = MR. FC Total and Marginal Values Price Sales D = AR MR Under normal conditions, the demand curve facing the firm is downward sloping from left to right. This implies that to sell increasing items of a product a firm must accept a lower price for each successive unit. AR = TR/Q. The area under the curve represents TR Marginal Revenue (MR) is the addition to TR as a result of selling one extra unit of output. If the D curve is downward sloping, each unit is sold at a progressively lower price. The MR curve lies under the D(AR) curve. At the point where the MR cuts the horizontal axis, MR = O. That means that the addition to TR from selling one extra unit was 0. This is the definition for unit price elasticity of demand. Therefore the equivalent point on the D curve is where Ped = - 1 Ped = -1 Total and Marginal Values Price Sales D = AR MR When price elasticity of