Demand Curve & Marginal Revenue

[matt-taylor]

Hi all,

I've been trying for weeks now to get my head round marginal revenue, cost, profit and still my head is struggling grasp something that appears so basic - I need your help!

I'm currently trying to create a couple of graphs:

1. One representing the demand & marginal revenue curves.

2. Another representing marginal cost, revenue & profit.

can anybody help?

I'm a complete novice at this, so please bare with me... But what I've managed to do so far is:

1. One the demand and marginal revenue curve is create a graph using the formula: Q = a minus bP

What I'm struggling with is what is the value of "b"? Currently I've set it at 5, but is this right when a = 1 and P = 0.013?

P.S. to create the graph using a spreadsheet I'm struggling the get the quantity figures to show on the x-axis, does anyone know how?

2. For the marginal cost, revenue & profit graph I've used the basic formulas I've found on the internet but I still don't think my graph is right as it all appears jagged and not smooth - please see the picture attached.


Does this look right to anyone and can anyone explain to me why the marginal cost dips the marginal revenue & marginal profit increases dramatically?

Thanks in advanced for your help on this, it will be greatly and deeply appreciated,
Matt.

 

[JeffM]

Hi all,

I've been trying for weeks now to get my head round marginal revenue, cost, profit and still my head is struggling grasp something that appears so basic - I need your help!

I'm currently trying to create a couple of graphs:

1. One representing the demand & marginal revenue curves.

2. Another representing marginal cost, revenue & profit.

can anybody help?

I'm a complete novice at this, so please bare with me... I don't want to bare with you: I'm shy, you see. But what I've managed to do so far is:

1. One the demand and marginal revenue curve is create a graph using the formula: Q = a minus bP

What I'm struggling with is what is the value of "b"? Currently I've set it at 5, but is this right when a = 1 and P = 0.013?

P.S. to create the graph using a spreadsheet I'm struggling the get the quantity figures to show on the x-axis, does anyone know how?

2. For the marginal cost, revenue & profit graph I've used the basic formulas I've found on the internet but I still don't think my graph is right as it all appears jagged and not smooth - please see the picture attached.
View attachment 3412

Does this look right to anyone and can anyone explain to me why the marginal cost dips the marginal revenue & marginal profit increases dramatically?

Thanks in advanced for your help on this, it will be greatly and deeply appreciated,
Matt.

The problem statement is obscure, and your difficulties appear to be numerous. Consequently, I am not sure that I can answer, but I shall give a start.

First of all do you remember how to graph a linear function? Do you remember what a linear function is?

It appears that you have been asked to graph a linear demand function. Economic theory has no requirement that a demand function be linear, but it is common to assume that such a function is "smooth." Such a function will be approximately linear locally, but may not be linear globally. In practice, such functions are almost never linear globally, but linear functions are very simple to graph and work with so they are frequently used as examples.

Second, what you have told us about this problem indicates that the demand function is Q = a - bP. That is a standard Walrasian formulation, where price is the independent variable. (Marshall made quantity the independent variable.) In normal math, the independent variable is represented by the horizontal axis, but, for some reason, economists usually show price on the vertical axis. In excel, you put the co-ordinates of the points to be graphed in columns side-by-side. I am not particularly skilled at excel and so cannot give you much help in using it. However, linear equations can be graphed without the help of a spread sheet.

Third, I am not sure I understand the problem at all. Where do a = 1 and P = 0.013 and b = 5 come from? Are they mentioned in the problem? You may think that Q = 1 - 5 * 0.013 = 1.000 - 0.065 = 0.935 makes no sense. How can you have less than 1 cow? Technically, you are correct. The economists' pretense that their functions are continuous is, strictly speaking, make-believe. But Q may represent units such as millions of pounds, and there is no difficulty whatsoever in an answer of 935,000 pounds.

Fourth, do you remember domain and range? The range of Q must be non-negative and finite. The domain of P must be non-negative and finite. To put it more simply, your graph will lie exclusively in the first quadrant, and it will have a horizontal and a vertical intercept.

Fifth, if you do not understand this, I can explain it in greater depth. Economists usually make the counter-factual assumption that demand, supply, etc are represented by differentiable and therefore continuous functions. This lets them use calculus and so greatly simplifies their math. The marginal revenue function of the firm is simply the derivative of the firm's revenue function. The firm's revenue function is simply its demand function. A linear revenue function implies a linear marginal revenue function.