Page 239 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes

Give your opinion on income or revenue income.

11.8 Total Revenue and Elasticity of Demand

The total revenue curve and marginal revenue curve are downward in monopoly condition. It means
that the elasticity of demand is different in various points of average revenue curve. The relation
between average revenue and marginal revenue can be identified by elasticity of demand. It must be
known that the average revenue curve is demand curve for a firm. By this a firm knows that the price of
production will change in which direction. The relation between Average Revenue (AR) and Marginal
Revenue (MR) can be explained by elasticity of demand in Fig. 11.11.
In Fig. 11.11, AR is average revenue curve and MR is marginal revenue curve. It reveals that the elasticity
of demand is greater (E > 1) than average revenue curve on the left side of point M. So, the marginal curve
would be positive. It means if the firm decreases the price of product then the total income would increase.
So when marginal revenue is positive means the average revenue is greater than elasticity of demand then
the firm should determine less cost to product. The average revenue curve is equal to elasticity of demand (E
= 1) at point M. In this condition, the marginal revenue would be zero. So if in this situation, a firm changes
its price then the total revenue would not change. In this condition, there is no profit if firm changes the
price of product. The average revenue curve is less than elasticity of demand (E = 1) at point M. In this case
marginal revenue is negative. So the firm will get profit if it increases the price of product. In other words,
we can say that, (1) The marginal revenue can be positive, negative or zero but the average revenue will
always be positive. (2) When marginal revenue is positive then the average revenue is greater than marginal
revenue but when marginal revenue gets negative then average revenue gets lesser.

Fig. 11.11

Y

E > 1
Revenue M E = 1

E < 1
+ve

O Zero X
O –ve AR
MR
Output

The relation between average revenue, marginal revenue and elasticity of demand can be as follows:
(i) When the elasticity of demand is infinity (a horizontal demand curve), marginal revenue is equal
to average revenue.
We know that—
)
e – 1 )
1 __

MR = AR ( d _____ = AR ( 1–

e
e
d d
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