3.3.1 - Revenue Flashcards
What are revenues ?
Revenues are the payments firms receive when they sell the goods and services they produce over a given time period.
What are the three different types of revenue ?
total, marginal and average revenue.
What is Total revenue ?
A firm’s total revenue (TR) is obtained by multiplying the price at which a good is sold (P) by the number of units of the good sold (Q):
TR = P X Q
What is Marginal revenue ?
A firm’s marginal revenue (MR) is the additional revenue arising from the sale of an additional unit of output:
MR = ⧍TR/⧍Q
What is Average revenue ?
A firm’s average revenue is revenue per unit of output sold:
AR = TR/Q
What influence do competitive firms have over price ?
They have no influence over price
What influence do less competitive firms have over price ?
Firms operating under less competitive conditions do have varying degrees of control over price, depending on their degree of market power.
Perfect competition
The firm has no control over price, and price is constant as output varies
Imperfect competition
The firm has some degree of control over price, and price varies with output
How does PED change with the AR and MR curves ?
The top half of the demand curve, where the elasticity is -4, is price elastic and the bottom half of the demand curve, where the elasticity is 2/3, is price inelastic.
What happens if the firm lowers/increases prices on the elastic part of the demand curve ?
We can say that on the elastic part of the demand curve, if the firm lowers prices then total revenue increases and if it raises prices then total revenue falls.
What happens if the firm lowers/increases prices on the inelastic part of the demand curve ?
If we consider the inelastic part of the demand curve, if the firm lowers prices then it will witness a fall in revenue and if the firm raises prices then it will experience a rise in revenue.
