3.3.1 Revenue Flashcards
Revenue
The money firms receive from selling their goods or services.
Total revenue
The total amount of money received, in a time period, from a firm’s sales.
Total revenue calculation
Output x Price
Average revenue
The revenue per unit sold.
- Average revenue is equal to price.
- The AR curve is the demand curve.
Average revenue calculation
Total Revenue / Quantity
Marginal revenue
The extra revenue received as a result of selling an additional unit of output.
- Marginal Revenue is the difference between total revenue at the new sales level and total revenue at one unit less.
Marginal revenue calculation
Change in total revenue / Change in output
What does a firm’s demand curve show?
What quantity of a product a firm will be able to sell at a particular price.
The demand curve can be labelled as AR.
Price takers
Firms which have have no power to control the price it sells it at – price takers have to accept the price set by the market.
Demand curve for price takers
Price takers demand curve will be completely flat - demand is perfectly elastic. This is because average revenue stays the same as price takers always have to sell at the market rate.
Perfectly elastic demand curve
When demand is perfectly elastic, the price is the same, no matter what the output level.
In this case, marginal revenue = average revenue because each extra unit sold brings in the same revenue as all the others.
When average revenue is constant, total revenue increases proportionally with sales, as in the diagram below:
Price makers
Firms that have some power to set the price they sell at.
Demand curve for price makers
A price maker’s demand curve will slope downwards - to increase sales, the firm must reduce the price.
Where is total revenue is maximised?
When a firm operates at the midpoint of the demand curve.
MR = 0.
- (At the point where additional sales reduce total revenue, marginal revenue becomes negative.)
