ECON 3411 Lecture Notes - Lecture 17: Inverse Demand Function, Marginal Revenue, Demand Curve

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Topic: elasticity and marginal revenue: the marginal revenue can be derived from a market demand curve. Marginal revenue measures the additional revenue due to a change in output: this link relates marginal revenue to the own price elasticity of demand as follows: When < < 1 then, (cid:1844) > 0. For a linear inverse demand function, mr(q) = a + 2bq, where b < 0: when mr > 0, demand is elastic; mr = 0, demand is unit elastic; mr < 0, demand is inelastic. Measures responsiveness of a percent change in demand for good x due to a percent change in the price of good y. If (cid:1843)(cid:1850),(cid:1842)(cid:1851) > 0, then (cid:1850) and (cid:1851) are substitutes. If (cid:1843)(cid:1850),(cid:1842)(cid:1851) < 0, then (cid:1850) and (cid:1851) are complements. Cross-price elasticity in action: suppose it is estimated that the cross-price elasticity of demand between clothing and food is -0. 18.

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