eco105 9-10 Flashcards
Marginal Revenue
Additional revenue from more sales or from selling one more unit
The simple rule for smart business decisions
choose when marginal revenues are greater than marginal costs
Fixed costs ____ affect smart choices
don’t
Marginal revenue equals
the price of output, and both are constant as the quantity produced increases
Marginal revenue depends on
market structure → how competitive your industry is and whether your business is a price taker or price maker
Marginal revenue can also be defined in two ways
Change in total revenue
Revenue from selling one more unit
One price rule
Most products and services have one price, not a different price for each customer because competitive economic forces tend to equalize prices
In perfect competition, what effects does producing more have on the market
no effect on the market because as a small producer, the increase in supply does not affect market supply or market price
What creates pricing power
Barriers to entry, brand loyalty or advertising
For price makers, the marginal revenue curve is
different from the demand curve because marginal revenue is less than price
For price takers, the marginal revenue curve is
the demand curve
Diminishing returns
as output increases, decreasing productivity increases marginal costs
When increases in output lead to lower (diminishing) productivity
marginal costs increase
Most businesses that are not operating near capacity have
constant marginal costs as they increase output, looks like a horizontal line
Recipe for Profits
estimate marginal revenues and marginal costs and then set the highest price that allows you to sell the highest quantity for which marginal revenue is greater than marginal cost
Fixed costs
costs that do not change with the quantity of output produced
Price discrimination
charging customers different prices for the same product or service, increases a business’s total profits
Price discrimination breaks the one-price rule, and is possible only when a business can:
Prevent low-price buyers from reselling to high-price buyers and
Control resentment among high-price buyers