- This topic has 4 replies, 2 voices, and was last updated 9 years ago by
.
- Posts
I’ve just got my head around the concept of profit being maximised at the point the Marginal Cost (MC) line meets the Marginal Revenue (MR) line on a graph.
But what I don’t understand is the Sales Price and Marginal Revenue relationship. How can the optimum price be greater than the marginal revenue?
I’ve read and re-read the explanation from my text book, but I think if someone could perhaps re-phrase it or explain it in another way then it might click.
My text books states:
“It is important to make clear the distinction in your mind between the sales price and marginal revenue. In this example, the optimum price is PN, but the marginal revenue is much less. This is because the addtional sales unit to reach output QN has only been achieved by reducing the unit sales price from an amount higher than for PN for all the units to be sold, not just the marginal extra one. The increase in sales volume is therefore partly offset by a reduction in unit price; hence MR is lower than PN”
Suppose at a price of $20 they sell 100 units – the revenue is 2,000
Suppose they drop the price to $19 and the sales increase to 106 units. The revenue goes up to 2,014.So the marginal (extra) revenue is $14 (which is less than the selling price).
I really do suggest that you watch the free lecture on pricing where all of this is explained in detail with examples (I obviously can’t type out the whole lectures here 🙂 ). If you watch all our lectures then you have a complete course for Paper F5 and you don’t need the Study Text – all you need is a Revision Kit because question practice is so vital.
John, I just finished watching the first lecture on pricing which fully explains the concept which I’d been struggling with for a while. Really, really, helpful, thank you very much. This is a fantastic service which you’re offering, very, very grateful.
- You must be logged in to reply to this topic.