3.3.1 Revenue Flashcards
What is total revenue and how do you calculate it ?
Total revenue shows how much money a firm receives in total from sales. You work it out from multiplying price by quantity
What is average revenue and how do you work it out ? and what is it equal to
It shows what a business receives on average from each sale. Total revenue is divided by quantity. It is EQUAL to price
How do you draw an average revenue curve and what is an important rule ?
AR curve is the demand curve as average revenue is equal to price. AR curve must start from the price axis exactly.
What is AR equal to even if output is 0 ?
AR is always equal to price
What is marginal revenue ?
This is the additional revenue a firm makes from selling one extra unit of a good
What is the relationship between Marginal revenue and total revenue ?
Whenever MR is positive, total revenue increases. Whenever MR is 0, total revenue stays the same.
Whenever MR is negative, total revenue decreases
What is marginal revenue formula ?
The formula is the change in total revenue divided by the change in quantity.
When do we use the MR formula ?
We use the MR formula when quantity is more than 1. If quantity increases by 1, the change in total revenue is the marginal revenue
How do we draw the MR curve ? What are the 3 rules you need to follow when drawing the curve ?
The 1st rule is that the curve starts at the top of the axis at the same point as AR. The 2nd rule is that when MR turns negative it will be half the AR quantity range on the graph on the y axis. The third point is that the MR curve stops when the AR quantity is 0
How do you draw the TR curve ?
TR increases when MR is positive. The maximum point is when MR is equal to 0. Then TR decreases when MR is negative
What is total revenue maximisation point ?
This is where MR is equal to 0.
When PED is elastic, what happens to total revenue when price increases and why ?
TR will decrease. This is because an increase in price will result in a larger decrease in quantity as it will have a larger impact on the consumers and will be very responsive. This larger decrease will lead to TR going down.
When PED is elastic, what happens when price decreases ?
When price decreases total revenue will go up. This is because as price decreases quantity demanded will go up by a larger amount which will have a bigger impact on consumers and will be more responsive. Therefore resulting in TR increasing.
When PED is inelastic, what happens when price increases ?
When price increases TR will also go up. This is because when price decrease quantity demanded will go up by a smaller amount as it has a lower impact on consumers and will be less responsive. This results in revenue going up.
When PED is inelastic, what happens when price decreases ?
TR will go down when price decreases. This is because when price goes down, quantity demand will go up by a larger amount as it is inelastic and has a lower impact on consumers and will be unresponsive to changes in price. TR will therefore go down also.
