3.3.1 Revenue Flashcards
What is total revenue?
The total output of money received from any given level of output over a given period of time
What is average revenue?
- average receipt per unit sold
What is marginal revenue?
The receipts from selling an additional unit of output
How do you calculate total revenue?
Quantity sold x price
How do you calculate average revenue?
total revenue/ quantity sold
How do you calculate marginal revenue?
Change in total revenue/ change in output
What is PED when prices are constant?
- AR=MR curve horizontal
- perfectly elastic demand
What happens to PED if price falls as sales rise?
- price elastic if TR increases as prices fall
- price inelastic if TR falls
How does marginal revenue relate to PED?
- PED is elastic as long as MR is positive
- PED is inelastic if MR is negative
When is PED unity or 1?
- TR is maximised
- MR is zero
What is a price taker?
firms that have no market power and are unable to influence price - they take the ‘going price’ offered by the market
What firm is present in perfect competition?
Price taker
Observations from a price taker model?
- firm is a price taker at P1
- every unit of output is sold at the same price
- a higher price would decrease sales to zero
- a lower price would result in all sellers lowering their price
- MR=AR=demand —> perfectly elastic
What is TR on a price taker?
- perfect competition = constant rate
- diagonal line from 0
What is a price maker?
A firm with market power that is able to manipulate prices in order to change demand - monopolistic, oligopoly + monopoly
Observations from price maker model?
- in order to sell an additional unit of output, the price (AR) must be lowered
- both AR + MR fall with additional units of sale
- when AR, MR falls by twice as much = gradient is twice as steep
- when MR=0 —> PED = 1, unitary elasticity
What is the TR of a price maker?
TR is maximised when MR=0
What is the total revenue rule?
- states that in order to maximise revenue, firms should increase the price of products that are inelastic in demand
- and decrease prices on products that are elastic in demand
What happens when a good/service is price elastic in demand?
- there is a greater proportional increase in quantity demanded in response to a decrease in price
- TR is higher once the price has been decreased
- (P2 xQ2) > (P1xQ1)
What happens when a good/service is price inelastic in demand?
- there is a smaller than proportional decrease in the quantity demanded to an increase in price
- TR is higher once the price has been increased
- (P2xQ2)>(P1xQ1)
