Marginal Revenue and Price Elasticity of Demand

Marginal revenue is also linked to the price elasticity of demand. The full derivation is not needed here; it is enough to notice one fact — price elasticity of demand is greater than 1 when $MR$ is positive, and less than 1 when $MR$ is negative. Table 6.2 uses the same data as Table 6.1 and adds the elasticity: as quantity rises, $MR$ falls and so does the price elasticity of demand.

Recall that the demand curve is elastic where price elasticity exceeds unity, inelastic where it is below unity, and unitary elastic where it equals 1. Table 6.2 shows that for quantities below 10 units, $MR$ is positive and demand is elastic; for quantities above 10 units, $MR$ is negative and demand is inelastic; and at exactly 10 units, demand is unitary elastic.

Table 6.2: MR and Price Elasticity