3.3 Revenue & Profit

Question 1

Explain and calculate Total Revenue.

Answer 1

Total revenue is the sum of all money gained through sales of a good.

Total Revenue = Quantity sold * Price

Question 2

Explain and calculate Average Revenue

Answer 2

Average revenue is the average price per unit sold.
Useful for analysing and evaluating sales revenue maximisation.

AR= Total Revenue / Quantity Sold

Question 3

Explain and calculate marginal revenue

Answer 3

Marginal Revenue (MR) is the revenue received through the sale of one more unit of good.
If MR > MC, more profit can still be made.
If MR < MC, you are making a loss.
Therefore the optimal level of output is where MR = MC, as there is no profit to be lost or gained at EXACTLY this point.

MR = ∆ Total Renue / ∆ Quantity Sold

Question 4

Explain Accounting Profit.

Answer 4

AKA Net income, is the total revenue minus explicit costs.
DOES NOT include opportunity cost whereas economic profit does.

Question 5

Explain Normal Profit.

Answer 5

When total revenue = total costs(including opportunity cost).
The minimum level of profit a firm needs to stay in business and to stay competitive in a market.

Question 6

Explain Supernormal Profit.

Answer 6

AKA economic profit, it is where Total Revenue > Total Costs (including Opportunity Cost).
Usually temporary as it attracts competition unless high barriers to entry.

Long Run - Monopolies, SOME oligopolies.
Short Run - ALL but will attract competition.