3.3.1 Revenue Flashcards
Types of Revenue
> Total Revenue - the total amount of money coming into the business through the sale of goods and services.
- Quantity x price
Average Revenue (AR) - the average receipt per unit sold. Demand is equal to AR. It is the price of the good.
- Total revenue / output
Marginal Revenue (MR) - the extra revenue that the firm earns from selling one more unit of output.
- MR = Total revenue of ‘n’ goods - Total revenue of ‘n-1’ goods.
- OR it can be calculated by change in total revenue / change in total output.
Price Elasticity and Revenue (part 1)
> Some firms experience a perfectly elastic demand curve. These are firms in perfect competition.
These firms have no price setting power.
The price received for the good is constant, so MR=AR=D. Their curve is horizontal.
The TR curve is upward sloping, because prices are constant, so the more goods that are sold, the higher the revenue.
Price Elasticity and revenue (part 2):
> For most goods, the demand increases as price decreases, and there is a downward sloping demand curve, therefore a downward sloping AR curve.
The demand curve is the same as the AR curve, because it indicates the price that consumers are willing to pay for each quantity sold.
Firms with downward demand curves are in imperfect competition, so have some price setting power.
Price elasticity and revenue (part 3):
> For goods with a downward sloping demand curve, the elasticity of it is linked to MR.
> If MR is positive, when the firm sells the product at a lower price(or when they increase output) total revenue still grows, so the demand curve is elastic.
If MR is negative, TR decreases as price decreases/output increases. So the demand curve is inelastic.
When MR=0, TR is maximised and the demand curve is unitary elastic.
> This explains why the TR curve is a (upside down) U-shape. At first total revenue rises with output when MR is positive. It begins to decline when MR is negative.
