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Chapter 9

ECO105Y1 Chapter Notes - Chapter 9: Creative Destruction, Marginal Cost, Landing Fee

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Avi Cohen

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ECO105 Review Notes
Chapter 9. Pricing For Profits
9.1 Marginal Revenue
The business recipe for maximum profits: estimate marginal revenues and
marginal costs, and then set the highest price that allows you to sell the highest
quantity for which marginal revenue is greater than marginal cost
! Basic Ingredients
" Marginal revenue - additional revenue from more sales or from selling one
more unit
# Calculate as the change in total revenue / revenue from selling one
more unit of the product or service
" Marginal cost:
# Additional cost must pay to produce more units
# Fixed cost (sunk cost) do not change (e.g. rent, insurance) with change
in the quantity of output
# Fixed cost do not affect smart decisions
" Choose when marginal revenues are greater than marginal costs
# Key 1 of smart choice Choose only when additional benefits are
greater than additional opportunity cost
# Marginal revenue = additional benefits
! One Price Rule when buyers can resell
" Most products and services have only one price, not a different for each
# Lower price customer resells the product to make money
# Most products that are easily resold tend to have a single price
! Marginal Revenue
Marginal revenue depends on market structure how competitive the
industry is, and whether the business is a price taker or a price maker

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" Change in Total Revenue
The farmer plant more wheat, and total revenue increased from $40000 to
$44000, marginal revenue is the change in total cost
" Revenue from selling one more unit
Additional revenue of $4000 divided by 1000 additional units, he sell each
bushel for $4
! When marginal revenue equals price
" The business is a price taker in perfect competition, a small producer’s
increase in supply do no affect the market supply or market price
" Can sell as many units it can produce at the market price
" The marginal revenue for each additional unit sold is the price
" The demand curve is also a marginal revenue curve
Marginal revenue = price
! When Marginal Revenue is less than price
" For price making businesses in monopoly, oligopoly, and monopolistic
competition, marginal revenue per unit is less than price
" One-price rule business must set only one price for the product that can
be easily resold; it must lower price on all units, not just new sales
" When price cuts increase total revenue, marginal revenue from each
additional unit sold decrease (as the sales increase)

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" Price-makers must choose one price and sell all products at that price before
the selling begin
" Marginal Revenue Curve
# Points on the marginal revenue curve use the value in halfway between
the quantities used for the marginal revenue calculation
# The marginal revenue curve for a price maker is not the same as the
demand curve $ for any quantity, marginal revenue is less than price
for price makers
% Smart Choices are made at the margin
& Even when marginal revenue is falling, total revenue is still increasing
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