3.3.1 Revenue Flashcards
What is revenue
is the income generated from the sales of goods and services in a market
What is average revenue
(AR) price per unit = total revenue / output
also known as the demand curve
What is Marginal revenue
MR = change in revenue from selling an extra unit of output
What is Total revenue
TR = Price per unit x Quantity (AR)
Work out the total revenue and marginal revenue
Total Revenue = Average revenue x Quantity
Marginal Revenue = change in revenue / change in quantity demanded
this is because the quantity demanded changes with price per unit
Where does the maximum total revenue occur
Where marginal revenue is zero
no more revenue can be achieved through selling extra units
How would
Marginal revenue
Average revenue
and Total revenue
Be presented on a graph for a price making firm
MR is twice as steep as AR
What is a price making firm
have the ability to set their own prices for the goods/services they sell
happens in imperfectly competitive markets
How would
Marginal Revenue
Average revenue
And total revenue
be presented on a graph for a price-taking firm
Their average revenue will equal their Marginal revenue (also their demand curve) because every unit is sold at the same price
TR is an upwards sloping line
What is a price-taking firm
\They have no pricing-power and have to accept market price
This means they have a perfectly elastic demand curve
They operate in perfectly competitive markets
For a price making firm
How does Elasticity link to the MR line
When Marginal revenue is 0, PED is 1, and total revenue is maximised
When MR is positive, PED is elastic - fall in price is smaller than the increase in quantity demanded
When MR is negative, PED is inelastic - fall in price is larger than the increase in quantity demanded
How will the PED along a straight-line demand curve vary?
At higher prices, fall in price will have an elastic response - fall in price leads to total revenue to rise
At lower prices, demand is price inelastic (<1) - fall in price leads to revenue to drop
For price maker firms, Marginal revenue is twice as steep as AR
Why?
because a business will have to drop prices on all proceeding units, therefore, units before have to be sold at a lower price
What is revenue maximisation
MR = 0 (no more additional revenue can be gained from producing an extra unit
(Where Mr crosses the x axis)
