Economics Micro & Macro (CliffsAP)

Part III: Microeconomics

Recall that marginal cost is the cost of producing one more unit of output. Marginal revenueis the additional revenue
obtained by selling one more unit of output. If marginal cost is less than marginal revenue, then the firm will make a profit.
However, if the firm’s marginal cost is higher than its marginal revenue, the firm will lose money. Profit is maximized
when marginal revenue equals marginal cost. Figure 10-1 illustrates the marginal cost and marginal revenue relationship
with profit and quantity.

Figure 10-1

Figure 10-1 illustrates the profit-maximizing rule of MR = MC with the production and revenues of laptop computers.
As output rises, so does revenue because of the quantities sold. Total costs also rise, demonstrating the firm’s increasing
costs at every quantity. According to our-profit maximizing rule, MR = MC, the point of profit maximization is at eight
laptop computers. At this point, our marginal revenue of $1,000 equals our marginal cost of $1,000. Notice our profit
and how it has peaked at $3,800. Profit continues to rise as quantity reaches its eighth laptop.

Marginal Revenue

The laptop example demonstrates profit maximization without the marginal revenue curve. The marginal revenue curve
is similar to the demand curve in that the demand curve is the average revenue curve. When the average revenue is
declining, so is the marginal revenue. Therefore, when the demand curve is downward sloping, the marginal revenue
curve is also downward sloping but lies below the demand curve.

The steeper the demand curve, the steeper the marginal revenue curve; the flatter the demand curve, the flatter the mar-
ginal revenue curve. Remember that the marginal revenue curve is positive as long as total revenue is rising and that it
is negative when total revenue declines. Since total revenue rises in the price-elastic region of the demand curve, mar-
ginal revenue is positive in that region. Total revenue then reaches its peak at the unitary point of the demand curve and
later falls at the inelastic point of the demand curve.

Criteria for Market Structures

In analyzing the behaviors of firms, economists have created categories to explain the relationship firms have with
prices, competition, products, and entrepreneurship. It is important to realize that not every industry fits perfectly into
a particular category. The groupings merely represent an effort to consolidate firms to help us understand the market
structure. The four categories are perfect or pure competition, monopoly, oligopoly, and monopolistic competition.

The market structure in which a firm produces and sells its product is defined by five characteristics:

■ Number of firms

■ Type of product

1,000

To t a l

Quantity Cost

0

1 2,000

2 2,800

3 3,500

4 4,000

4,500

5,200

5

6

7 6,000

8 7,000

9 9,000

0

To t a l

Revenue

1, 7 0 0

3,300

4,800

6,200

7,500

8,700

9,800

10,800

11, 7 0 0

0

Marginal

Revenue

1, 7 0 0

1,600

1,500

1,400

1,300

1,200

1,10 0

1,000

900

0

Marginal

Cost

1,000

800

700

500

500

700

800

1,000

2,000

-1,000

Profit

-300

500

1,300

2,200

3,000

3,500

3,800

3,800

2,700