3.3.1 Revenue

Question 1

Revenue

Answer 1

The income from selling g/s in markets

Question 2

Total revenue

Answer 2

Price x quantity

Question 3

Average revenue

Answer 3

Total revenue per unit of output
Total revenue ÷ quantity (AR = P)

Question 4

Marginal revenue

Answer 4

The extra total revenue gained by selling one additional unit
Change in total revenue ÷ change in quantity (new TR-old TR ÷ new Q ÷ old Q)

Question 5

Where is total revenue maximised?

Answer 5

When MR = 0
(Diagram)

Question 6

What do the relationships between the revenues depend on?

Answer 6

• it depends on the market structure under which a firm operates

Question 7

What happens if the firms cannot adjust the price?

Answer 7

If a price increase or decrease does not change total revenue the good or service is said to be unit elastic.

Question 8

Revenue under imperfect competition

Answer 8

• when price varies with output (downwards sloping demand curve)
• see graph

Question 9

Revenue for perfect competition

Answer 9

When price is not affected by the firm’s output (In markets where firms are price takers) the AR curve is horizontal. This shows the perfectly elastic demand for their goods.

Question 10

PED along average revenue

Answer 10

See graph
(Closer to y axis, PED is - infinity, closer to x axis, PED is 0)

Question 11

How does PED affect total revenue?

Answer 11

• elastic demand, increasing price = reduce total revenue
• inelastic demand, increasing price = increase total revenue & decreasing price will decrease total revenue

Question 12

Why is marginal revenue inferior/smaller than the average revenue (price)? (Imperfect competition)

Answer 12

• the additional revenue they receive is < the price they charge

Question 13

Relationship between total revenue and marginal revenue

Answer 13

• For linear demand curves, MR slope (gradient) is twice as steep as the demand curve
• MR < AR, where AR = P which is the demand curve
• the change in TR due to an increase in Q, called MR, can be split into two effects: Quantity effect and price effect

Question 14

Quantity effect

Answer 14

The increase area to total revenue along the x axis

Question 15

Price effect

Answer 15

The increased area of total revenue along the y axis

Question 16

Shifts in revenue curve

Answer 16

AR & MR will both shift
- due to changes in tastes, income, price of other goods and uncertainty over other firm’s prices
(See graph)

Question 17

Unit elastic

Answer 17

• quantity and price effect are exactly equal
• an increase or decrease in price doesn’t change TR

Question 18

Inelastic PED

Answer 18

• the price effect is stronger than the quantity effect
• a higher price increases total revenue (vice versa)

Question 19

Elastic demand curve

Answer 19

• quantity effect is stronger than price ffect
• a higher price reduces total revenue (vice versa)

Question 20

Things influencing the profitability of business

Answer 20

• cost factors (fixed costs: rent, loan, variable costs: employment tax, factor productivity)
• exchange rates (import)