3.3.1 - REVENUE Flashcards
3.3.1 - REVENUE
Define revenue and the equation.
Revenue is the income received by a firm for selling its output.
REVENUE = PRICE X QUANTITY SOLD
Define average revenue
TR / Q
Define marginal revenue
This is the extra revenue gained by selling one extra unit of good.
MR = CHANGE IN TR / CHANGE IN Q
What is a price maker?
A firm where the price varies with output. To sell more goods, the firm will have to reduce its price.
What is a price taker?
A firm where price is constant. The firm has no control over the price and they take the market price.
What is the TR curve for a price taker?
A straight diagonal line, upwards sloping and passing through the origin.
What is AR and MR for a price taker?
On a graph, this is a straight horizontal line. This is because for a price taker firm, the price is constant so MR and AR increase by a constant value each time.
Price maker diagrams
MR is under AR. MR turns negative and AR does not. At the point when MR is at 0 TR is at its maximum, and it is the highest point on the curve.
Relationship between TR and MR for a price maker
When MR is 0, this is when TR is at its maximum. When MR is 0, this indicates to the firm that in order to sell, prices need to be reduced, so when MR turns negative, the TR curve starts falling.
TR rises when MR is positive.
TR falls when MR is negative.
TR is max when MR = 0
AR curve for both firms
For price makers and price takers, the AR curve is equal to the price, so we can say that AR is the demand curve.
Elastic PED for a price maker
On the upward sloping part of the TR curve, and on the positive part of the MR curve.
MR is greater than 0, and TR is upwards sloping, so PED must be elastic. This is because the percentage fall in price level leads to a larger increase in QD so TR increases.
Inelastic PED for a price maker
Shown on the downward sloping part of the TR curve, and the part where MR turns negative.
A percentage fall in price must lead to a smaller % increases in QD so TR falls.
PED for a price taker
They have no control over price changes so PED is perfectly elastic and a straight horizontal line.
When doe revenue maximisation occur?
When MR = 0
