Elasticity, The demand curve and Revenue
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The key relationships with respect to Price elasticity, Marginal revenue and total revenue are described below. At the point of Unity Elasticity revenue is maximized. With prices higher than the unity price and quantities lower than the unity quantity the Marginal revenue is positive and the price is elastic, which means that consumers will respond to price changes by buying more or less
When the price becomes lower than the unity price Marginal revenue is lower than 0.
- Marginal revenue falls as output rises.
- Since the demand curve slopes downwards, the addition to total revenue from producing and selling extra units declines.
- Average revenue exceeds marginal revenue
- When the demand curve is downward sloping,the marginal revenue from selling one more unit falls faster than the average revenue from selling the total output.
- The marginal revenue curve declines at twice the rate of the demand (average revenue)curve.
- When total revenue is increasing,marginal revenue is positive
- When total revenue is falling,marginal revenue is negative
- Total revenue is maximized when marginal revenue is zero
- Which occurs when the price elasticity is unitary.Therefore,further attempts to increase total revenue by lowering price below P *will fail because the sales volume will not increase sufficiently to compensate for the price fall.
