3.3.1 Revenue Flashcards
What is revenue?
Revenue is the income generated from the sale of goods and services in a market
How is average revenue calculated?
Average Revenue (AR) = price per unit = total revenue / output (also known as the demand curve)
What is marginal revenue?
Marginal Revenue (MR) = the change in revenue from selling one extra unit of output
What is total revenue?
Total Revenue (TR) = Price per unit x Quantity or AR x Q
Calculate the TR and MR from these figures
Calculate the TR and MR from these figures
When does maximum TR happen?
Maximum total revenue occurs where marginal revenue is zero: i.e. no more added revenue can be achieved
from producing and then selling an extra unit of output.
Where is the point of MR=0 on a demand curve?
The point where MR=zero is directly underneath the mid-point of a linear demand curve.
What happens when MR=0 to the coefficient of PED?
When marginal revenue is zero, the coefficient of price elasticity of demand = 1
* That is, PED is unitary when TR is maximised
What happens when MR is positive to PED?
- When MR is positive, PED is relatively elastic
- A fall in price is proportionately smaller than the increase in quantity demanded
What happens when MR is negative to PED?
When MR is negative, PED is relatively inelastic
* A fall in price is proportionately larger than the increase in quantity demanded
Draw diagrams to show average and marginal revenue and revenue maximisation
Explain what price takers are
- Price takers operate in highly (perfectly) competitive markets
- They have no pricing power and have to accept the prevailing market price and do as well as they can
- This means that they have a perfectly elastic demand curve
- AR will be identical to MR, because every unit will be sold at exactly the same price
- Price takers have a low percentage market share
- Their TR curve will simply be an upwards sloping line
Explain what price makers are
- Price makers have the ability / power to set their own prices for the goods and services they sell
- This happens in all imperfectly competitive markets
- The demand curve (AR curve) is downward sloping
- Marginal revenue (MR) will lie below AR
Draw a diagram to illustrate AR, MR and TR for Price Making Firms
Draw a diagram to illustrate AR, MR and TR for Price Taking Firms
Explain the relationship between PED and TR also using a diagram
- Price elasticity of demand along a straight-line demand curve will vary
- At high prices, a fall in price will have an elastic price response – i.e. cutting prices causes total revenue to rise
- Demand is price inelastic (Ped < 1) towards the bottom of the demand curve – i.e. a fall in price causes total
revenue to drop
