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
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
-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
-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