Page 238 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-11: Concepts of Revenue

Notes
Fig. 11.10

Y

Q

Revenue R S P

A

O MR AR X
MN B
Output

∆PSA and ∆QRS are congruent.

PA = QR
PB
____
____

e = ___ = PM = PM (since QR = PA)
d PQ OQ PA
PM
____
(since PA = PM – AM)

or, e = PM = _________
d PA PM – AM
(Here PM = AR or average revenue; AM = MR or marginal revenue and e = Elasticity of Demand), So
d
it is proved that—
AR
e = _________

d AR – MR
If we know the formula given in two of the three elements, then we can find the third element.
AR
e = _________

d AR – MR
or, e (AR – MR) = AR
d
or, (e × AR) – (AR) = e × MR
d d
or, AR × (e – 1) = e × MR
d d
(e – 1) × AR
or, MR = ___________
d

e
d
e × MR
or, AR = d _______

(e –1)
d
So,
Average Revenue AR
Elasticity of Demand = ___________________________________ or e = _________

Average Revenue – Marginal Revenue d AR – MR
Elasticity of Demand × Marginal Revenue e × MR
d _______

Average Revenue = ______________________________________ or AR =

Elasticity of Demand – 1 (e – 1)
d
Average Revenue (Elasticity of Demand – 1) AR (e – 1)
__________
d

Marginal Revenue = ________________________________________ or MR = e d

Elasticity of Demand
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