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Is it true that the price demand equation is used to identify the linear relationship between price and demand. This states that with a lower price, we have more demand and vice versa.
It is also correct that to calculate the maximum profit which is where we have marginal revenue equals marginal cost (i.e. which is actually where we have optimal selling price) is solved using differentiation which is when we rearrange the marginal revenue equation (MR = a – 2bQ).
With this formula, we can also calculate the maximum revenue which is where we have marginal revenue equal to zero.
Is it all true?
1) When solving marginal revenue equation for the maximum profit (which is where MR = MC) using differentiation we are actually looking for the demand where we have the maximum profit because when we have less demand but more price which is where we earn maximum profit.
2) BUT when solving marginal revenue equation for the maximum revenue (which is where MR = 0) using differentiation we are actually looking for the demand where we have the maximum revenue because when we have more demand but less price which is where we earn maximum revenue.
3) Maximum profit is where we have higher price but lower demand from the customers since we are charging them higher price. BUT maximum revenue is where we have lower price but higher demand from the customers since we are charging them lower price.
This is due to the inverse relationship between price and demand explained by the price demand equation.
4) Please tell me whether differentiation is used when we have an inverse relationship between two variables to find out the value of one variable and using that value we find out the value of another variable?
Please correct me if I am wrong anywhere. Thank you so much.
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