## Price elasticity and marginal revenue, Managerial Economics

Assignment Help:

The most significant uses of the price elasticity of demand, used specifically in business decision-making. It refer to the relationship between price elasticity and the marginal change in the total revenue of the firm planning to change the price of its product. The relationship between marginal revenue (MR) and the price elasticity can be derived as follows.

Let's suppose that a given output, Q, is being sold at a price P, so that total revenue, TR, equals P times Q, which is

TR = P X Q ...................Eq. I

Because P and Q in eq. I are inversely related, a question arises, whether a change in P will decrease or increase or leave the TR unaffected. It depends on whether MR is greater than or less than or equal to zero, i.e., whether

MR > 0, MR < 0, or MR = 0

Marginal revenue, (MR) can be attained by differentiating TR = PQ with respect to P as illustrated below.

MR = δ (PQ) / δQ

= {P + δQ/ δQ} + {Q+ (δP/ δQ)}

=P+ {Q + (δP/ δQ)}

MR = P [1+ (Q/P). δP/ δQ]

Note that Q/P. δP/ δQ is the reciprocal of the elasticity that equals

(-P/Q). (δQ/ δP)

Thus, Q/P. δP/ δQ = -1/e

By substituting -1/e for Q/P. δP/ δQ in eq.1, we get

MR= P+ {1- (1/e)} ....... Eq.2

Equation 2 gives the relationship between price-elasticity (e) and MR.

#### Remedies for unemployment, REMEDIES FOR UNEMPLOYMENT The measures appro...

REMEDIES FOR UNEMPLOYMENT The measures appropriate as remedies for unemployment will clearly depend on the type and cause of unemployment.  Broadly they can be divided into:

#### Marginal cost, A firm in a perfectly competitive market invents a new situa...

A firm in a perfectly competitive market invents a new situation of production that lowers its marginal costs.  What happens to its output? What happens to the price it charges?

#### Super-comfort pillow, In the country of Sleep-well, the inhabitants' main a...

In the country of Sleep-well, the inhabitants' main activity is... sleeping. Despite the loss of productivity that this entails, the country has a profuse and renowned production o

#### Assignment, encrimetal concepts

encrimetal concepts

#### Full-service department, Like supermarkets, full-service department stores ...

Like supermarkets, full-service department stores like Macy's are mainly in decline. What factors may these types of stores have in common behind their declines? How would you veri

#### Supply and demand, Discuss some of the effects of the economic downturn on ...

Discuss some of the effects of the economic downturn on supply, demand, inferior goods, complimentary goods, substitute goods, and price. words accepted#

#### The acceleration principle, THE ACCELERATION PRINCIPLE Suppose that th...

THE ACCELERATION PRINCIPLE Suppose that there is a given ratio between the level of output Y t at any time t , and the capital stock required to produce it K t and that

#### What is the advantage of mixed economy system, Benefits are: 1) People...

Benefits are: 1) People can create their own decisions 2) The government has limited control, which is good for arrangement 3) Gives freedoms like Enterprise, ownership,

#### Discovery of new technical know-how, Q. Discovery of new technical know-how...

Q. Discovery of new technical know-how? Growth of Technical Know-how: Expansion of an industry may result in the discovery of new technical know-how. As a result of this firm

#### Types of income elasticity of demand, Types of Income Elasticity of demand ...

Types of Income Elasticity of demand Depending upon the product, demand might increase or decrease in response to a rise in income.  There are thus five types of income Elasti