Lecture notes ECN101 Business Economics (ECN101)

Production and Revenue
Revenue
 Marginal revenue is key to output decisions
 TR=P*Q
 AR=P*Q/Q=P
 MR=changeinTR/changeinQ

Two Market Structures
 Firm is too small to impact market prices
o Price taker
o Perfectly elastic (flat) demand curve
o Sell as much as it wants at market price
 Firm is big enough to impact market prices - it could be a monopolist or oligopolist
o Price setter Or Price maker
o It faces a downward sloping demand curve
o The price it can charge will depend on the amount produced

Price taker
 MR=AR
o Will sell zero output if price above market
o No reason to price below market

Price maker
 Marginal revenue slopes downwards under the demand curve
 Have to lower price to sell another unit
o All customers must pay this lower price
 MR must be below AR
 MR goes negative if you try to sell too much

Elasticity Along a Linear Demand Curve
 Elasticity does not equal slope
 Elasticity varies along a linear demand curve
o Top half elastic
o Bottom half inelastic
o Unit elastic when MR=0
 MR is positive when demand curve is elastic
 MR is negative when demand curve is inelastic