Revenue Maximization, Specialization and exchange
Revenue maximization for monopoly
The first case relate to revenue maximization for monopolies. There are two ways in which a firm with pure monopoly can increase it revenue. The first option is to increase the price of the product and the second option is two lower the price of the product so as to increase the number of quantity sold (Hirschey, 2008). Choosing the right option depend on the prevailing condition. For a monopoly to increase its revenue through the first option i.e. increasing the price two important conditions must be met. First, the marginal revenue must be less than marginal cost. Marginal revenue refers to the additional revenue that is generated by increasing the sale by one unit. Marginal cost refers to the additional cost incurred by producing one extra unit (Mankiw, 2014). When the marginal Revenue is less than marginal cost it simply mean that cost increase at a higher rate than does the revenue. In such case, a monopoly cannot, maximize revenue by increase sale since the cost incurred will be higher than revenue generated. The only option left is to decrease the sale by increasing the prices so as to achieve the optimal sale quantity. Optimal Sale quantity is achieved when Marginal Cost = Marginal revenue (Hirschey, 2008).
Secondly, the demand for its product must be inelastic. Inelastic demand is one which is insensitive to changes in price and income (Hall and Lieberman, 2007). In inelastic demand, an increase in price (say from P1 to P2) lead to no change or very little change in the quantity demand (say q1 to q2) as shown below.
A monopoly can increase it revenue through the second option i.e. Lower price, when two condition are met. First, the Marginal Revenue must be greater than Marginal Cost (Hirschey, 2008). When the marginal revenue is greater than marginal cost, it means that total revenue increase at a higher rate that the total cost and as such a monopoly can increase it revenue by increase sale output. However, to increase the sale output a monopoly has no option rather that lower prices for it product since it is subjected to the law of demand.
Secondly, the demand for its product must be elastic. Elastic demand is one which is very sensitive to price in that a small increase in prices (say from P1 to p2) lead to a large increase in quantity demand (from Q1 to Q2) (Hall and Lieberman, 2007) as shown by the diagram below. In this case the monopoly reduces the price but the demand increases significantly leading to high revenue.
In conclusion, a monopoly can maximize revenue by increasing price only when the marginal cost is higher than marginal level and the demand for its product is inelastic. On the other had it can increase revenue through by lowering prices only when marginal revenue is greater than marginal cost and the demand for its product is elastic. When the marginal cost equal to marginal revenue neither lowering nor increasing prices can lead to an increase in revenue.
Specialization and exchange
The major reason why countries trade with each is because no country is self –sufficient. Every country needs other for supplies of necessary goods and services that it lack or cannot be able to produce efficiently. It is for this reason that every economic system is characterised by two features i.e. specialization and exchange. Specialization is the process whereby a country concentrates on a limited number of productive activities. It is very important as it allows economies to gain comparative advantage. Comparative advantage refers to the capacity and ability to produces certain goods and services more efficiently than other countries (Hall and Lieberman, 2007). However, since specialization mean concentration on particular goods and services, it become necessary for economies to exchange. Exchange is the process in which two countries engage in trade in order to acquires good and services they the lack capacity to produce or cannot produces them efficiently. For example, Australia has long history of exchanging good with the united state. Australia export agriculture products such meat, which it produce in abundance and more cost effectively, to the united stated while at the same time received goods such as electronic appliances which it lack capacity to produce efficiently from the united state (OCE 2014).
The scarcity of resources has made specialization and exchanges the only mean possible to meet the demand for goods and services each economy needs. This therefore clearly indicates that if a country can be able to produces efficiently all the goods and services it needs, then there would be no need for it to engage in trade with other countries. However, as of today, it impossible for a country to produces good and services it needs more efficiently than other countries and for that reason specialization and exchange remain the only option economies has to meet their demand for goods and services more efficiently.