Important Microeconomic Formulas Total Product = Quantity (Q) Average Product (AP) = Total Product (Q) / Labour (L)

Q) / Labour (L) Marginal Product (MP) = Change in Total Product / Change in Labour Profit = Total Revenue (TR) Total Costs (TC) Profit = (Average Revenue Average Cost) x Quantity Total Revenue (TR) = Price (P) x Quantity (Q) Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Total Cost (TC) = Average Cost (AC) x Quantity (Q) Average Cost (AC) = Total Costs (TC) / Quantity (Q) Average Fixed Costs (AFC) = Total Fixed Costs (TFC) / Quantity (Q) Average Variable Costs (AVC) = Total Variable Costs TVC) / Quantity (Q) Average Revenue (AR) = Total Revenue (TR) / Quantity (Q) AR = P = Demand (Dd) Marginal Revenue (MR) = Change in Total Revenue / Change in Quantity Marginal Cost (MC) = Change in Total Cost / Change in Quantity

CHAPTER 3 THE REPRODUCTION PROCESS IN GENERAL PART 2 The Formula (P + C) + L = TOTAL PRODUCT ( T. PRD ) For this reason it is perfectly possible to impress upon each product how many labour-hours its production has cost. There are, of course, certain installations which produce no tangible product, such as the social and economic councils, the health service, education and so on; but these also are just as well able to determine how many labour-hours in means of production and labourpower they have consumed, so that here also the costs of reproduction can be exactly revealed. Should we wish to make a concise definition of reproduction, then we would say: MEANS OF PRODUCTION AND LABOUR-POWER ARE THE DIRECTLY OPERATIVE FACTORS IN PRODUCTION. IN ASSOCIATION WITH NATURE, THERE ARISES OUT OF THEIR INTERACTION A MASS OF PRODUCTS IN THE USE-VALUE FORM OF MACHINES, BUILDINGS, FOODSTUFFS, RAW MATERIALS ETC. ON THE ONE SIDE, THIS MASS OF PRODUCTS MOVES FROM FACTORY TO FACTORY IN AN UNBROKEN STREAM; AND ON THE OTHER SIDE, IT IS USED UP IN THE INDIVIDUAL NEEDS OF THE CONSUMERS Each factory secures its reproduction through an exact accounting of means of production (= p) and labour ( = L ), expressed in labour-hours. The production formula for each factory is therefore expressed as follows: p + L = product

Profit Maximization Quantity Level: Marginal Revenue = Marginal Cost Breakeven Point: Price = Average Cost Shutdown Point: Price = Average Variable Cost

Key Steps To Profit Analysis 1. 2. 3. Marginal Revenue = Marginal Cost to find Quantity Profit Maximization From Quantity go up to the Average Revenue Curve to find Price From Quantity go up to the Average Cost Curve to find Cost Draw Profit Rectangle between the Average Cost Curve & Average Revenue Curve AR > AC = Profit / AC > AR = Loss / AR = AC = Breakeven As is well known the Marxist category "means of production" comprises machinery and buildings ( fixed means of production), and also raw materials and auxiliary materials (circulating means of production). If now we use for fixed means of production the letter p and for the circulating means of production the letter c, then the formula takes on the following form: ( p + c ) + L = product If for the sake of clarity we now replace the letters by fictitious figures, then production in, for instance, a shoe factory would reveal the following schematic: ( p + c ) + L = product that is ( machinery + raw material ) + Labour = 40000 pairs of shoes, that is, in labour-hours (L-Hrs)

4.

( 1250 L-Hrs + 61250 L-Hrs) + 62500 L-Hrs = 125000 Labour-Hours. therefore to average: 125000 Labour-Hours divided by 40000 pairs of shoes equals 3.125 Labour-Hours per pair of shoes. In this formula for production, the factory simultaneously finds its formula for reproduction, which shows how many LabourHours representing social product must be restored to it in order to renew everything that has been used up. That which applies for each separate industrial establishment also holds good for the whole communist economy. In this sense, the latter is only the sum of all the economic installations active at any given moment in the economy. The same is also valid for the total social product. It is nothing other than the product ( p + c ) + L for the total of all economic establishments. In order to distinguish this from the sphere of production accounting control for the separate industrial establishments, we use for the total product the formula: (P + C ) + L = Total Product If we assume the sum of all used up machinery ( P ) - in all the industrial installations = 100,000,00 Labour-Hours and that for raw materials - ( C ) = 600,000,000 Labour-Hours; and if also 600,000,000 Labour-Hours of living labour-power - ( L ) - were consumed, then the schematic for total social production would appear as follows: ( P + C ) + L = Total Product ( 100 million + 600 million ) + 600 million = 1300 million Labour- Hours All industrial installations taken together thus take out of the total social stock 700,000,000 Labour-Hours of product in order to reproduce the physical part of the productive apparatus, whilst the workers consume 600,000,000 Labour-Hours of the final social product. In this way the reproduction of all the production elements is assured. Let us now consider the reproduction of labourpower in particular. In our example 600,000,000 Labour-Hours are available for individual consumption. More than this cannot and must not be consumed, because in the industrial establishments only 600,000,000 Labour-Hours in the form of labour certificates has been accounted for. This however bears no relation to

how that product is to be distributed amongst the workers. It is, for instance, quite possible that unskilled, skilled and intellectual labour will all be remunerated differently. Distribution could, for instance, be carried out on such a basis that the unskilled receive three-quarters of an hour pro rata for each one hour performed, the skilled exactly one hour and the officials and fore-persons three hours. AVERAGE PRODUCT: The quantity of total output produced per unit of a variable input, holding all other inputs fixed. Average product, usually abbreviated AP, is found by dividing total product by the quantity of the variable input. Average product, which occasionally goes by the alias average physical product (APP), is one of two measures derived from total product. The other is marginal product. Average product is the per unit production of a firm. Conceptually, it is simply the arithmetic mean of total product calculated for each variable input over a whole range of variable input quantities. Average product is generally considered less important than total product and marginal product in the analysis of short-run production. The formula for specifying and calculating average product from total product is given as: total product variable input

average product

Average Production The table at the right summarizes the hourly production by Waldo's TexMex Taco World of Super Deluxe TexMex Gargantuan Tacos (with sour cream and Average Taco Product jalapeno peppers). The total product numbers presented can be used to derive the average product. The column on the left is the variable input, specifically the number of workers employed by Waldo's TexMex Taco World, which ranges from 0 to 10. The column to the right is the total product, the total number of TexMex Gargantuan Tacos produced, which ranges from a low of 0 to a high of 125 before declining to 110. Keep in mind that the taco production from these workers depends on

a given amount of fixed inputs, Waldo's TexMex Taco World restaurant and all of the capital that goes with it. Not yet shown in this table is average product. This deficiency can be easily remedied.

Third, while it might not be obvious from this table, average product continues to decline as Waldo's workforce expands, but average product is NEVER negative. To have a Average Product Curve

First, consider the average product for Waldo's TexMex Taco World workforce if Waldo employs only one worker. With one worker, total production is 20 Gargantuan Tacos each hour. Averaging this total production of 20 tacos over the variable input of one worker, gives an average product of 20 Gargantuan Tacos. Click the [One] button to display the average product for one worker.

Now consider the average product if Waldo's employs two workers. In this case, the total hourly production is 50 Gargantuan Tacos. Dividing 50 tacos by two workers gives an average product of 25 Gargantuan Tacos. Click the [Two] button to display the average product for two workers.

negative average product, total product must be negative, and that just does not make sense. The Average Product Curve The average product curve is a graphical representation of the relation between average product and the variable input. The average product curve for Gargantuan Taco production is displayed to the right. The "general" slope of this curve is negative, with per unit output lower for larger workforces. However, the average product curve is actually "hump" shaped, with a positive slope giving way to a negative slope. Consistent with the numbers in the table, the curve reaches a peak of 25 Gargantuan Tacos at both 2 and 3 workers before the slope turns negative. Total and Marginal Two related product measures are total product and marginal product.

Consider one more calculation. If Waldo's employs three workers, the total hourly production increases to 75 Gargantuan Tacos. Dividing 75 tacos by three workers results in an average product of 25 Gargantuan Tacos. Click the [Three] button to display the average product for three workers.

The remaining average product values can be derived in a similar manner. To reveal the entire column of average product values, click the [Others] button. Please feel free to spot check the math on a few of these numbers by dividing the total product by the quantity of the variable input. An observation or three about this column of numbers is in order.

First, average product increases for the first two workers, reaches a peak of 25 tacos per worker per hour with either two or three workers employed, then declines thereafter.

Total Product: This is the total quantity of output produced by a firm for a given quantity of inputs. Total product is the foundation upon which the analysis of short-run production for a firm is based. It also provides the basis for calculating average product. If, for example, Waldo's TexMex Taco World has a staff of 5 that generates a total product of 110 tacos, then average product is 22 tacos.

Second, this decline in average product is indirectly caused by thelaw of diminishing marginal returns.

Marginal Product: This is the change in total product resulting from a change in the number of workers. Marginal

Marginal Taco Product

product indicates how the total production of TexMex Gargantuan Tacos changes when an extra worker is hired or fired. For example, hiring a 5th worker means that Waldo's TexMex Taco World total product increases from 95 to 110 tacos. The addition of a 5th worker results in the production of an additional 15 TexMex Gargantuan Taco MARGINAL PRODUCT: The change in the quantity of total product resulting from a unit change in a variable input, keeping all other inputs unchanged. Marginal product, usually abbreviated MP, is found by dividing the change in total product by the change in the variable input. Marginal product, which occasionally goes by the alias marginal physical product (MPP), is one of two measures derived from total product. The other is average product. Marginal product is the extra output generated by an extra input. Marginal product lies at the very foundation of the analysis of short-run production, playing THE critical role in the explanation of the law of supply and the upwardsloping supply curve using the law of diminishing marginal returns. Of the myriad of short-run production-related terms (including total product, average product, fixed input, variable input, short run, long run) marginal product is by far the most important. The formula for specifying and calculating marginal product from total product is given as: change in total product = change in variable input

The column on the left is the variable input, specifically the number of workers employed by Waldo's TexMex Taco World, which ranges from 0 to 10. The center column is the total product, the total number of TexMex Gargantuan Tacos produced each hour, which ranges from a low of 0 to a high of 125 before declining to 110. Keep in mind that the taco production from these workers depends on a given amount of fixed inputs, Waldo's TexMex Taco World restaurant and all of the capital that goes with it. Missing from this table is any mention of marginal product. This apparent oversight can be rectified with a few button clicks.

First, consider this question: What is the contribution of the first worker to total Gargantuan Taco production? Or put another way: What is the change in total product resulting from a change in the variable input? To answer these questions, note that total hourly Gargantuan Taco production with zero workers is also zero. No input, no output. But with one worker busily making Gargantuan Tacos, the hourly taco production increases to 20. The change in total product resulting from the employment of the first worker is 20. Click the [First] button to verify that the marginal product of the first worker is 20 tacos.

marginal product

The proper economic interpretation of marginal product is as the contribution of the last unit of variable input to total production. That is, how much does total product change by adding the last unit? If, for example, the marginal product of labor is 25 tacos, then this means that employing the last worker causes total product to increase by 25 tacos. Does this mean the last worker personally produces 25 tacos? No, not at all. Or at least, not necessarily. It means that having this person employed by the firm causes total product to increase by 25 tacos. More often that not, this added worker makes existing workers more productive. Marginal Taco Production The table at the right summarizes the hourly production by Waldo's TexMex Taco World of Super Deluxe TexMex Gargantuan Tacos (with sour cream and jalapeno peppers). The total product numbers presented can be used to derive the marginal product.

How about the marginal product of the second worker? A click of the [Second] button reveals that employing the second worker adds 30 Gargantuan Tacos to the hourly taco production of Waldo's TexMex Taco World. This number is found by taking the difference between total hourly taco production with one worker (20 Gargantuan Tacos) and the total hourly taco production with two workers (50 Gargantuan Tacos).

Now consider the marginal product of the third worker. Adding a third worker

boosts total hourly taco production from the 50 Gargantuan Tacos produced by two workers to 75 Gargantuan Tacos produced by three workers. This means that the marginal product of the third worker is 25 Gargantuan Tacos. To display marginal products associated with the addition of the remaining workers, click the [Others] button. What interesting and useful information can be derived from this expanded table?

product curve for Gargantuan Taco production is displayed to the right. The "general" slope of this curve is negative, with incremental output declining for larger workforces. However, the marginal product curve is actually "hump" shaped, with a positive slope giving way to a negative slope. Consistent with the numbers in the table, the curve reaches a peak of 30 Gargantuan Tacos for the second worker. Total and Average Two related product measures are total product and average product.

First, the marginal product of workers increases for the first two workers, reaching a peak of 30 Gargantuan Tacos, then declines thereafter. The increasing marginal product observed for the first few workers illustrates increasing marginal returns and the decreasing marginal product observed for all subsequent workers illustrates decreasing marginal returns. Moreover, the decreasing marginal products is attributable to the law of diminishing marginal returns, THE key principle underlying the study of short-run production.

Total Product: This is the total quantity of output produced by a firm for a given quantity of inputs. Total product is the foundation upon which the analysis of short-run production for a firm is based. It also provides the basis for calculating marginal product.

Second, notice that marginal product decreases so much that it becomes zero for the eighth worker and even becomes negative for the ninth and tenth workers. The zero value of marginal product for the eighth worker also occurs where the total product has reached its maximum value. Coincidence? Not at all. The peak of the Marginal Product Curve

Average Product: This is the amount of output produced per worker, found by dividing the total product by the number of workers. If, for example, Waldo's TexMex Taco World has a staff of 5 that generates a total product of 110 tacos, then average product is 22 tacos

ECONOMIC PROFIT: The difference between the total opportunity cost of production and the total revenue received by a firm. Economic profit is what remains after ALL opportunity cost associated with production (including a normal profit) is deducted from the revenue generated by the production. Economic profit is one of three alternative notions of profit. The other two are accounting profit and normal profit. Economic profit is THE indicator used by economists when the conversation turns to efficiency. In a perfect world, that is, a perfectly efficient world, no firm receives economic profit. Firms receive economic profit only when price exceeds the opportunity cost of production, which is not efficient. But how would a firm stay in business without generating economic profit? A firm can remain in business and continue producing goods and services so long as it is able to pay ALL opportunity cost. One key opportunity cost is a normal profit, the profit entrepreneurship could earn with alternative production. Because accounting profit is generally the combination of normal profit and economic profit, zero

total product curve has a zero slope. Marginal product is another term for the slope of the total product curve. The Marginal Product Curve The marginal product curve is a graphical representation of the relation between marginal product and the variable input. The marginal

economic profit does not mean zero accounting profit. Revenue Minus Cost Economic profit is the difference between total revenue and total cost. This is commonly summarized with the following equation: economic total revenue = profit total cost Sources of Economic Profit While a world of perfect efficiency would see no economic profit, in the real world, firms often do receive above-normal, economic profit. In fact, some good can be had with positive economic profit. This can be seen by noting three reasons for economic profit: (1) market control, (2) risk, and (3) innovation.

Innovation: Firms also receive economic profit as a reward for innovative activity, that is introducing a new product or a technological innovation, also which may or may not succeed. Innovation profit is the reward for entrepreneurship seeking to be first onto the market with a particular good or service.

Risk profit is also beneficial for the economy. Without the prospect of this economic profit, entrepreneurship would lack the incentive to introduce new products. And society would miss out on the resulting benefits of technological innovations. People might still be living in caves, picking berries, and gnawing on mastodon bon PROFIT: Generally speaking, the difference between revenue received by a firm for production and cost incurred in the production, or the excess of revenue over cost. Three specific notions of profit exist, each with a different meaning. Accounting profit is the difference between revenue and accounting cost. Economic profit is the difference between revenue and total opportunity cost. Normal profit is opportunity cost of entrepreneurship. Profit is occasionally used synonymously with the term rent, or economic rent. In general, profit is the revenue remaining after paying expenses. It is the primary motivator for a great deal of production activity undertaken bybusiness firms. The common catch-phrase is that firms seek to "maximize profit." This pursuit of profit creates important incentives to achieve anefficient allocation of resources. Greater profit can be achieved by increasing revenue or by decreasing cost.

Market Control: One of the most common reasons for economic profit is market control by a firm. A firm has market control if it can exert some degree of influence, or control, over the market price. Market control, especially that held by monopoly and oligopoly firms, generates profit by inefficiently allocating resources. By controlling the price, a firm is able to generate more revenue, and thus more profit, than it would in a more (perfectly) competitive situation. This is NOT a good type of profit for the economy. It is, however, the type of profit most often encountered in the analysis of short-run production.

Risk: Economic profit is also generated due to the risk of organizing production. Some entrepreneurship is willing to undertake more risky production activities, and in so doing they are rewarded with greater economic profit. Risk profit is generated as a reward for undertaking a risky activity that may or may not succeed, especially launching a new business venture. Risk profit is a good type of profit for the economy. Without the prospect of "extra" reward, by way of economic profit, for taking the risk of production, such risky activities would not be pursued. And society would miss out on the resulting benefits.

Revenue can be increased by producing products with higher prices. But prices are higher because buyers are willing to pay more, which presumes they receive greater satisfaction (or utility).

Cost can be decreased by using resources with lower prices, meaning resources with lower opportunity cost. But opportunity cost is lower because alternative goods and services produced by the resources are less valuable.

All together, the pursuit of profit motivates firms to allocate resources to the production of goods and services that are most highly valued by society. Firms allocate resources away from goods that are less valuable and which generate

less profit. These resources are then allocated toward goods that are more value, and which generate more profit. Revenue Minus Cost A generic formula for specifying and calculating profit is: prof revenue = it cost The critical consideration in this formula is what exactly is included as "cost." Accounting profit includes accounting expenses as "cost." Economic profit includes economic, or opportunity, cost as "cost." Profit Times Three Different types of cost underlie three common notions of profit in the study of economics, especially short-run production of a firm-accounting profit, economic profit, normal profit.

Normal Profit: The last notion of profit is the opportunity cost of using entrepreneurial abilities in the production of a good, or the profit that could have been received by entrepreneurship in another business venture. Like the opportunity costs of other resources, normal profit is deducted from revenue when determining economic profit. It is, however, never included as an accounting cost when accounting profit is computed.

Economic Profit and Rent Economic profit is closely related to the term economic rent. In many cases the two terms can be use synonymously with no loss of meaning. Both are the excess of revenue received over opportunity cost. If a difference does exist, it is based on who receives the economic profit/rent. Economic profit is generally the term used when a firm has an excess of revenue over opportunity cost. Economic rent, in contrast, is commonly used when a specific resource receives revenue (that is, factor payment) over and above opportunity cost. The idea of economic rent as an excess payment has its basis in rental payments to landowners. The presumption is that because the land is "fixed" in supply, then the land would be supplied regardless of rental payment. Whether the rent is high or low, the quantity of land supplied is the same. While this idea is not really correct--land has alternative uses just like any other resource--the idea that economic rent represents excess revenue, like economic profit, remains in use. TOTAL REVENUE: The revenue received by a firm for the sale of its output. Total revenue is one two bits of information a firm needs to calculate economic profit, the other is total cost. In general, total revenue is the price times quantity--the price received for selling a good times the quantity of the good sold at that price. For a perfectly competitive firm, which receives a single unchanging price for all output sold, the calculation is relatively easy. For other real world firms, that charge different prices to different buyers for different quantities, the calculation can be more complex. Two other revenue measures directly related to total revenue are average revenue and marginal revenue. Total revenue is often depicted as a total revenue curve. Total revenue is important to the analysis a firm's short-run productiondecision. A firm generally seeks to produce the quantity of

Accounting Profit: The most common notion of profit in the real world of business activity, is the difference between revenue andaccounting cost. This is the profit listed on a firm's balance sheet, appears periodically in the financial sector of the newspaper, and is reported to the Internal Revenue Service for tax purposes. When real world talk turns to profit, it is invariably accounting profit. Accounting profit is based on accounting cost--the explicit, out-ofpocket, expenses incurred by a firm. While these explicit payments often compensate resources for their opportunity cost, such is not necessarily the case. In some cases, an accounting cost is made even though no opportunity cost has occurred. In other cases, an opportunity cost is incurred without an explicit payment.

Economic Profit: The notion of profit preferred in economics is the difference between the total revenue received by a firm and the total opportunity cost of production. Economic profit is what remains after ALL opportunity cost associated with production, the opportunity cost incurred by ALL factors of production, is deducted from the revenue generated by the production. Economic profit is the "conceptually correct" notion of profit used in economics. If profit is revenue minus cost, then economic profit is THE measure of profit.

output that maximizes profit, which is the difference between total revenue and total cost. Total revenue can be represented in a table or as a curve. For a perfectly competitive firm, the total revenue curve is a straight line that emerges from the origin. For a monopoly, oligopoly, or monopolistically competitive firm, the total revenue curve is a "hump-shaped" curve, increasing at a decreasing rate, reaching a peak, then declining. The total revenue received by a firm is price times quantity, often expressed as this simple equation: total pric quant = x revenue e ity Perfect Competition The essence of total revenue is best illustrated by perfect competition. Perfect competition is a market structure with a large number of small firms, each selling identical goods. Perfectly competitive firms have perfect knowledge and perfect mobility into and out of the market. These conditions mean perfectly competitive firms are price takers, they have nomarket control and receive the going market price for all output sold. Total Revenue, Zucchini Style The table to the right summarizes the total revenue received by a hypothetical firm, Phil the zucchini grower, for selling zucchinis in a perfectly competitive zucchini market. The first column is the quantity of zucchinis sold, ranging from 0 to 10 pounds. The second column is the price Phil receives for selling his zucchinis, which is $4 per pound. The third column is then the total revenue Phil receives for producing and selling alternative quantities of zucchinis. If Phil sells only one zucchini, then he receives only $4. If he sells five zucchinis, he receives $20. In each case, total revenue in column three is calculated as the quantity in the first column multiplied by the price in the second column. Consider a few highlights of these total revenue numbers.

Second, the price remains unchanged. Phil can sell 1 pound of zucchinis or 10 pounds of zucchinis for the same $4 price.

Third, as Phil sells more zucchinis he receives more total revenue. Moreover, because the price remains fixed, the only way for Phil to obtain more total revenue is to sell more zucchinis.

Total Revenue Curve, Zucchini Style

Fourth and last, for each extra pound of zucchinis Phil sells, he receives an extra $4 of revenue. This suggests an important role of marginal revenue in the short-run production analysis of a perfectly competitive firm.

Total revenue is commonly represented by a total revenue curve, such as the one displayed in the exhibit to the right. This particular total revenue curve is that for zucchini sales by Phil the zucchini grower. The vertical axis measures total revenue and the horizontal axis measures the quantity of output (pounds of zucchinis). Although quantity on this particular graph stops at 10 pounds of zucchinis, the nature of perfect competition indicates it could go higher. This curve indicates that if Phil sells 1 pound of zucchinis, then he receives $4 of total revenue. Alternatively, if he sells 10 pounds, then he receives $40 of total revenue. Should he sell 100 pounds, then he would move well beyond the graph, with $400 of total revenue.

First, total revenue is zero if Phil sells no zucchinis. This makes sense. If nothing is sold, no revenue is received.

The "curve" is actually a "straight line" because Phil is a price taker in the zucchini market. He receives $4 for each pound of zucchinis sold whether he sells 1 pound or 10 pounds. The constant price is what makes Phil's total revenue curve a straight line. Monopoly, Oligopoly, and Monopolistic Competition For market structures like monopoly, oligopoly, and monopolistic competition that are price makers rather than price takers, total revenue is little different. Although it is calculated as price times quantity, market control means these market structures face negativelysloped demand Total Revenue, curves. As such, Medicine Style the price received is not fixed, but depends on the quantity of output sold. The table to the right summarizes the total revenue received by another hypothetical firm, Feet-First Pharmaceutical. This firm owns the patent to Amblathan-Plus, the only cure for the deadly foot ailment known as amblathanitis. As the only producer of Amblathan-Plus, Feet-First Pharmaceutical is a monopoly with extensive market control, facing a negatively-sloped demand curve. To sell a larger quantity of Amblathan-Plus, Feet-First Pharmaceutical must lower the price. Consider a few tidbits of information about total revenue for a firm with market control.

revenue... UP TO A POINT. While total revenue received by Feet-First Pharmaceutical increases for the first 10 ounces sold, it declines for the 12th ounce.

Fourth and last, unlike perfect competition, the extra revenue Total Revenue Curve, Medicine Style

generated for selling more medicine is not constant nor is it equal to the price. For example, the 5th ounce of medicine adds a extra $6 of revenue even though the price is $8. The total revenue curve for firms with market control looks a little different than that for perfect competition. The total revenue curve for Feet-First Pharmaceutical is displayed in the exhibit to the right. Key to this curve is that Feet-First Pharmaceutical is a monopoly provider of a drug called Amblathan-Plus and thus faces a negatively-sloped demand curve. Larger quantities of output are only possible with lower prices. The vertical axis measures total revenue and the horizontal axis measures the quantity of output (ounces of medicine). Although quantity on this particular graph stops at 12 ounces of medicine, it could go higher. This curve indicates that if Feet-First Pharmaceutical sells 1 ounce of medicine (at $10 per ounce), then it receives $10 of total revenue. Alternatively, if it sells 10 ounces (at $5.50 per ounce), then it receives $55 of total revenue. Should it sell 12 ounces (at $4.50 per ounce), then it receives only $54 of total revenue. For Feet-First Pharmaceutical the total revenue "curve" actually is a "curve." The slope of this

First, like perfect competition, total revenue is zero if Feet-First Pharmaceutical sells no medicine. This makes sense. If nothing is sold, no revenue is received.

Second, the price changes with the quantity of output sold. Feet-First Pharmaceutical can sell 1 ounce of medicine for $10 per ounce. However, if it choses to sell 5 ounces, then it must lower the price to $8 per ounce.

Third, as Feet-First Pharmaceutical sells more medicine it receives more total

curve falls as more output is produced, eventually reaching a peak, then becoming negative. The changing slope of this curve is due to the changing price. Although this total revenue curve, and preceding table of total revenue numbers, is based on the production activity of Feet-First Pharmaceutical, a well-known monopoly firm, it could also be for any firm with market control. Monopolistic competition and oligopoly firms that also face negatively-sloped demand curves generate comparable total revenu