Economics

for Managers

How do
we think
about our
customers
valuing
our
product?

1
Demand Video:
Basics (A)

Topics
• Demand Curve & Demand Function
• Total, Average & Marginal Revenue

Demand Curve

Shows the relation

between the price and
the quantity demanded
of a good

2
 What if price is lowered?
“Change in quantity demanded” or “movement along
the demand curve” through a change in price.

P1 x
P Demand
x Curve
P2

Q

Q
Q1 Q2

Demand Function
The quantity demanded is not just a function of price. It is
influenced by many factors. For example:
• product’s price
• product’s attributes
• consumer tastes & preferences
• consumer income
• price of related goods
• advertising
• number of customers
• final product’s demand (for intermediate goods)
• prevailing interest rates
How do we show these factors on our demand curve graph that
has only P and Q axes??

3
 What if advertising is increased?

“Change in demand” or “shift in demand” reflects

a change in a non-price factor of demand.

Demand Curve 2
(high ads)
P1

Demand Curve 1
(low ads)

Q1 Q2

Demand for Poultry

Scenarios:
1: beef price ↑ 10%
Price ($/lb)
2: bird flu epidemic

substitute more
expensive

reduced demand
for poultry
D0 D1
D2
Quantity (lbs/yr)

4
 MARKET DEMAND CURVE is the
horizontal summation of the
P INDIVIDUAL DEMAND CURVES

10
Demand 2

Demand 1
5

3 8 10 15 Q

MARKET DEMAND CURVE is the

horizontal summation of the
P INDIVIDUAL DEMAND CURVES

10 X
Demand 2

Demand 1
5 X

3 8 10 13 15 23 Q

5
 MARKET DEMAND CURVE is the
horizontal summation of the
P INDIVIDUAL DEMAND CURVES

10 Market Demand =
Demand 2 Demand 1 + Demand 2

Demand 1
5

3 8 10 13 15 23 Q

Total, Average, and

Marginal Revenue
At price P:
• Total Revenue (TR) = P •Q
• Average Revenue (AR) = TR/Q = P•Q/Q = P
• Marginal Revenue (MR) = TRQ - TRQ-1

6
 P ($/unit) Q P=AR TR MR
0 - 0 -
BAD NEWS OF
SELLING UNIT 2:
1 11 11 11
loss on first unit of $4 2 7 14 3
11 3 4

Demand Curve
7
GOOD NEWS OF
SELLING UNIT 2:
4 gain on second
unit of $7

Q
1 2 3

P Q P=AR TR MR
($/unit)
0 - 0 -
1 11 11 11
2 7 14 3
BAD NEWS OF 3 4 12 -2
11 SELLING UNIT 3:
loss on first two
units of $6
Demand Curve
7
GOOD NEWS OF
4 SELLING UNIT 3:
gain of $4

Q
1 2 3

7
 An important and general property between MR and P is that
MR ≤ P. Or, since P and AR are the same when we sell all
units at the same price, our general property is that MR ≤ AR.
The reason this is true is because:
price received
P = AR = GOOD NEWS for next unit

while MR = GOOD NEWS – BAD NEWS

effect of next unit on lowering

revenue from other sales:
=(drop in price)x(#other sales)

What we’ll see next is that for a linear demand curve (or for
any section of a demand curve that is linear), there’s actually
an even stronger pattern between MR & P than just MR ≤ P.

16 Demand & Marginal Revenue

$/unit

12
P
8 MR

0 Q
1 2 3 4 5 6 7 8
-4 Q P TR MR
0 - 0 -
1 14 14 14
-8 2 12 24 10
3 10 30 6
-12 4 8 32 2
5 6 30 -2
6 4 24 -6
7 2 14 -10
8 0 0 -14

8
 Demand & Marginal Revenue:
16 Discrete vs. Continuous
$/unit

12 Demand P
MR
8

0 Q
1 2 3 4 5 6 7 8
-4
MR
-8

-12

16
Demand & Marginal Revenue:
$/unit

Continuous Case
12
Demand, P, AR
8

4 MR

0 Q
1 2 3 4 5 6 7 8
-4
ALWAYS:
-8 1) Demand curve, P curve, & AR curve are the same.
2) MR ≤ AR = P
-12
FOR LINEAR DEMAND CURVES:
1) MR curve and Demand curve have the same y-intercept.
2) MR curve is twice as steep as the Demand curve.
3) The x-intercept of MR is half the x-intercept of the Demand curve.

9
 16
Demand & Marginal Revenue:
$/unit
Continuous Case
12
Demand, P, AR
8

4 MR

0 Q
1 2 3 4 5 6 7 8
-4

-8 HOW TO INTERPRET THIS GRAPH.

Example with Q=5.
-12
A price of $6/unit can be supported with Q=5

MR at the fifth unit is -$4/unit.

What you should

KNOW after this video

• The demand curve doesn’t ignore non-price factors of

demand. It fixes their values, though, and then allows the
price of the product to vary.

• AR = TR/Q and MR = TRQ – TRQ-1

• Can explain why P = AR ≥ MR

• Can take the two tables of demand information in this

video and i) determine MR; and ii) draw the Demand and
MR curves based on the tables

10