2.6. Revenue and Profit Flashcards
Total Revenue (TR)
Total income received by a firm from selling output.
Total Revenue =
Price x Quantity
Average Revenue (AR)
Revenue per unit of output sold.
Average Revenue =
Total Revenue / Quantity
Marginal Revenue (MR)
Additional revenue from selling an extra unit of output
Marginal Revenue =
∆ in Total Revenue / ∆ in Quantity
Revenue for a price taker
- Total Revenue curve upwards, straight sloping from origin
- MR = AR = D - horizontal curve (Perfectly elastic PED)
Revenue for a price maker
- Total Revenue curve - same shape as DMU total utility curve
- Marginal Revenue curve - downwards sloping going below x axis like DMU marginal utility curve
- AR = D - downwards sloping but doesn’t go below x axis and is above MR curve
- where total revenue is at maximum and MR = 0, the PED is unitary
- before MR = 0, the PED is elastic
- after MR = 0, the PED is inelastic
Accounting Profit
Total Revenue > Total Cost
Accounting Loss
Total Revenue < Total Cost
Economic Profit
1) Normal Profit
- when profit is equal to opportunity cost, the economic profit is $0
2) Abnormal Profit
- when profit is more than opportunity cost, the economic profit is positive
3) Subnormal Profit
- when profit is less than opportunity cost, the economic profit is negative
Normal Profit
the minimum amount of profit required to keep a firm operating in the industry.
Abnormal Profit (supernormal profit)
any profit made over and above normal profit.
Subnormal Profit (economic loss)
any profit made that is less than normal profit.
Profit Maximising Condition
A firm will maximise its profits at the output level where marginal revenue is equal to marginal cost:
- -> MR = MC
- this is also the loss minimising condition - if a firm makes a loss, the smallest possible loss also occurs when MR = MC.
