The Short-Run at RIU:

The Graphics

Marginal/Average Costs and Revenues

 

Total Profit

 

Marginal Profit

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ConLZMξ{Ӻkԇʴ渖K,P:/ʽdM&\OiUTa.ya>0B=0}0TSf2o4|,1Fq' 񉹱8/0H'ٳL7ٲPG-ƀQ}c`0C Ek/AuŗDx1Jh9 "E3.fbA8ðw@ H"!Y>$%nV(,e[SF)L{"x߈Yh-k%f)&`k@/{?e$>P!l$ e.Eοjvcoqs¨6Ksja %k5YwjB噫}RvK)eRs O}n;i W8KSg9aoVKsʲKνb&b9hbx .Y]{p8q(<pP0Wrd^K~HM͔$Mqz h:L2hQ@;w do we go from the demand curve to a revenue curve? I sugest we return to the basics, the first two columns in the table below which represent demand. [If we graphed the relationship between price and quantity we would have the demand curve which we have looked at before. This would allow us to develop a set of revenue graphs which you can find here]. Once we have the demand information it is fairly easy to compute a number of important revenue concepts. Total revenue, which appears in the third column, is derived by multiplying the two columns (R = P*Q). Average revenue, or revenue per unit of output, is derived by taking total revenue and dividing it by output (Ex. AR @ 4 units of output equals 28/4 = 7). Marginal revenue, the change in revenue generated by a one unit change in output, appears in the final column. For example, when the decision is made to increase output from 3 to 4, revenue increases from 24 to 28. In this case we would compute the marginal revenue of the 4th unit of output as (MR = (28-24)/(4-3) = 4/1 = 4). We are now ready to combine

Demand and Revenue

Quantity (Q)

Price (P)

Revenue (TR)

Average Revenue (AR)

Marginal Revenue (MR)

1

10

10

10

2

9

18

9

8

3

8

24

8

6

4

7

28

7

4

5

6

30

6

2

6

5

30

5

0

  • Total profit: total revenue - total cost
  • Total revenue: relationship between sales revenue and output = P x Q
  • Total cost: relationship between production cost and output
  • Marginal profit: additional profit obtained by producing and selling 1 more unit of output = marginal revenue - marginal cost
  • Marginal revenue: additional revenue obtained by selling 1 more unit of output

Overview

 Outline

 

R> 

Revenue, Cost, and Profit Data

Return to our university, but now let's add in the revenue side of the information. Once again we cannot use the decision rule (MR=MC), but rather we continue to expand the level of output as long as MR>MC. The optimal size of the university is 9800 students and the university is making a profit of $39,000.

Students

Tuition

TR

MR

TC

AC

MC

Total Profit

Marginal Profit

6700

$10.00

$67,000

$45,000

$6.7

$22,000

7300

$10.00

$73,000

$10.00

$48,500

$6.6

$5.83

$24,500

$4.17

8000

$10.00

$80,000

$10.00

$52,000

$6.5

$5.00

$28,000

$5.00

8775

$10.00

$87,750

$10.00

$55,500

$6.3

$4.52

$32,250

$5.48

9800

$10.00

$98,000

$10.00

$59,000

$6.0

$3.41

$39,000

$6.59

10125

$10.00

$101,250

$10.00

$62,500

$6.2

$10.77

$38,750

($0.77)

10400

$10.00

$104,000

$10.00

$66,000

$6.3

$12.73

$38,000

($2.73)

10625

$10.00

$106,250

$10.00

$69,500

$6.5

$15.56

$36,750

($5.56)

 

A Graphical Representation

Perfect Competition (Long Run)

Revenue, Cost, and Profit Data

Return to our university, but now let's assume that we have allowed entry into the market. As new universities come into the market the tuition rate is driven down until the maximum profit at the university is 0. Once again we cannot use the decision rule (MR=MC), but rather we continue to expand the level of output as long as MR>MC. The optimal size of the university is 9800 students and the university is making a profit of $971. [it would be zero profit except for rounding errors]

Students

Tuition

TR

MR

TC

AC

MC

Total Profit

Marginal Profit

6700

$5.10

$34,170

$35,010

$5.23

($840)

7300

$5.10

$37,230

$5.10

$38,509

$5.28

$5.83

($1,279)

($0.73)

8000

$5.10

$40,800

$5.10

$42,009

$5.25

$5.00

($1,209)

$0.10

8775

$5.10

$44,753

$5.10

$45,509

$5.19

$4.52

($757)

$0.58

9800

$5.10

$49,980

$5.10

$49,009

$5.00

$3.41

$971

$1.69

10125

$5.10

$51,638

$5.10

$52,509