AP MicroeconomicsElasticity
Marginal Revenue and Elasticity
Marginal revenue is positive when demand is elastic, zero at unit elasticity, and negative when demand is inelastic—so a price-maker never sells in the inelastic range.
Cutting price raises quantity but lowers revenue on existing units; which effect wins depends on elasticity. Where demand is elastic, the quantity gain dominates, so MR is positive and total revenue rises as price falls. At unit elasticity, MR equals zero and total revenue peaks. Where demand is inelastic, MR is negative. Because a monopolist would never operate where extra output reduces revenue, it always produces on the elastic portion of its demand curve.
Formula / Example
MR = P(1 − 1/|E_d|); MR > 0 if elastic, MR = 0 at unit elastic, MR < 0 if inelastic.