3.3.1 - Revenue

Question 1

a) Formulae to calculate and understand the relationship between:

total revenue

Answer 1

• TR = the total amount of money coming into the business through sale of goods and services
• TR = Price x Quantity
• TR curve is upwards sloping because prices are constant so more goods sold = more revenue

Question 2

a) Formulae to calculate and understand the relationship between:

average revenue

Answer 2

• The price each unit is sold for
• AR = TR/Q (output)
• AR is the demand curve as it shows relationship between average price and quantity sold so AR=D

Question 3

a) Formulae to calculate and understand the relationship between:

marginal revenue

Answer 3

• The extra revenue a firm earns from the sale of one extra unit. It is the difference between total revenue at different levels of output. When marginal revenue is 0, total revenue is maximised.
• MR = Change in TR / Change in Q (output)

Question 4

b) Price elasticity of demand and its relationship to revenue concepts

perfectly elastic, PED elastic/inelastic, MR

Answer 4

PED - Perfectly elastic curve:
- Price received by firm for good is constant so MR=AR=D for the good is identical - horizontal curve
- this means PED for the good is perfectly elastic - whatever %change in P = no %change in Qd

PED - Downward sloping demand curve
- however when the price decreases as sales increases = change in PED along AR curve
- if D is price inelastic - ^P = ^ Spending = ^ Total revenue (TR)
- If % fall in Qd < % rise in P = TR increases
- if PED is elastic = % P rise will = even larger % fall in Qd = fall in TR

PED - MR:
- For goods with a downwards sloping demand curve, the elasticity of the curve is linked to MR
- If MR is positive, firm sells product at lower price, TR grows and so demand is elastic until output Q
- If MR is negative, TR decreases as price decreases and so demand curve is inelastic after output Q Explains why TR curve is a U shape, first total revenue rises with output then it begins to decline