3.3.1: Revenue

Question 1

What is revenue?

Answer 1

Revenue is the money earned from the sale of goods and services.

Question 2

What is total revenue (TR)?

Answer 2

The total amount of money coming into the business through the sale of goods and services.

Question 3

What is the formula of total revenue?

Answer 3

Quantity x Price

Question 4

What is average revenue?

Answer 4

• Its the average amount of money coming into a business through the sale of goods and services.
• Demand is equal to AR

Question 5

What is the formula for average revenue (AR)?

Answer 5

Total revenue/ output

Question 6

What is marginal revenue?

Answer 6

• The extra revenue that the firm earns from selling one more unit of production,

Question 7

What is the formula of marginal revenue?

Answer 7

• Change in Total revenue/ change in output

Question 8

What is the effect when firms experience a perfectly elastic demand curve?

Answer 8

• These firms are in perfect competition
• These firms have no price setting power.
• The price received by the firm for the good is constant and so MR=AR=D

Question 9

How does a perfectly elastic demand curve affect the graph?

Answer 9

• The demand curve is horizontal
• The TR curve is upward sloping because prices are constant and so the more goods that are sold, the higher the revenue made.

Question 10

What are characteristics of perfect competition?

Answer 10

• Many buyers/ sellers
• Homogenous goods
• Firms are price takers
• No barriers to enter/ exit
• Perfect information
• Horizontal Demand Curve
• Marginal Revenue Equals Price
• Profit Maximisation
• Normal Profits in the Long Run

Question 11

When are firms price takers?

Answer 11

• In perfect competition

Question 12

What is price taker behaviour?

Answer 12

• The price of the good or service is determined by the market and individual firms have no control over it.
• If selling price can’t be controlled, there is perfectly elastic demand.
• The marginal revenue is equal to average revenue.

Question 13

Why is the demand curve horizontal in perfect competiton?

Answer 13

• This is as the demand is perfectly elastic.
• The firms can sell any quantity of output at the prevailing market price but can’t influence the price by changing its output level.

Question 14

Where do firms reach profit maximisation in a perfectly competitive market?

Answer 14

• MC equals the market price.
• This results in a profit- maximising output level where the firms total revenue just covers total costs with profit or loss depending on the relationship between total revenue and total cost.

Question 15

What are the characteristics of imperfect competiton?

Answer 15

• Few buyer/sellers
• Differentiated goods
• Firms are price makers
• High barriers to enter/ exit
• Imperfect Information
• Downward Sloping Demand Curve
• Profit Maximisation
• Marginal Revenue and Price Relationship

Question 16

What is price maker behaviour?

Answer 16

• The ability of a firm or entity to influence or set the price of a good or service in the market.
• Price makers have partial control over the price at which their goods are sold.
• Firms can maximise total revenue by operating at the point where the price elasticity of demand is equal to -1.

Question 17

Why is the curve downward sloping in imperfect competition?

Answer 17

• Firms are price makers, so they will set high prices and then governed by law of demand.
• MR is twice as AR

Question 18

Marginal Revenue (+) and the Elasticity of the Curve

Answer 18

• If MR is positive, when the firms sells the product at a lower price (or when they increase output), total revenue still grows and so the demand curve is elastic.

Question 19

Marginal Revenue (-) and the Elasticity of the Curve

Answer 19

• If MR is negative, TR decreases as price decreases (or output increases) and so the demand curve is inelastic.

Question 20

Marginal Revenue (0) and the Elasticity of the Curve

Answer 20

• When MR=0, TR is maximised and the demand curve is unitary elastic.