Chapter 8.docx

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Paul Cohen

Chapter 8: Pricing for Profits (Marginal Revenue and Marginal Cost) Marginal Revenue: Additional revenue from selling one more unit or from extension of sellers -The revenue you get from selling one more product or service -Depends on market structure, how competitive your industry is, and whether your business is a price taker or price maker Fixed Costs: (Suk costs): do not change with changes in quantity of output -For price-taking businesses (extreme competition), Marginal revenue = Price. -For price makers (Monopoly, Oligopoly, Monopolistic Competition), marginal revenue is less than price. Because of one-price rule, businesses must lower price on all units, not just new sales. -Even when price cut increases total revenue, marginal revenue from each additional unit sold decreases as sales increase. -As output increases, what happens to marginal costs depends on supply side of business’s cost. Increasing Marginal Costs -Businesses operating near capacity, or shifting to move expensive sources of inputs, have increasing marginal costs to increase output. Constant Marginal Cost -Businesses not operating near capacity have constant marginal costs to increase output. -Estimate marginal revenues and marginal costs and then set prices that allow you to sell all quantities for which marginal revenue is greater than marginal cost -Recipe for maximum profits is easiest to follow by fist looking at quantity decision, then price decision. -Look in sequence at each quantity—first piercing, second piercing, and so on. For each quantity, compare marginal revenue and marginal cost. If marginal revenue is greater than marginal cost, produce. Total profits will increase, stop increasing quantity when marginal revenue l
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