3.3.1 - revenue

Question 1

what is the formula for total revenue?

Answer 1

total revenue = price x quantity
TR = P x Q

Question 2

what is the formula for average revenue?

Answer 2

average revenue = total revenue / quantity
AR = TR / Q = (PxQ) / Q = P
Average Revenue = D = P (the price line), downward sloping demand curve only

Question 3

what is the formula for marginal revenue?

Answer 3

marginal revenue = change in total revenue / change in quantity
the additional revenue from the sale of an extra unit (rate of change = gradient of TR)

Question 4

What is revenue like for firms with perfectly elastic demand?

Answer 4

These firms are in perfect competition, have no price setting power. The price received by the firm is constant so MR = AR = D, the demand curve is horizontal. TR curve slopes upwards because prices are constant and so the more goods sold, the higher the revenue.

Question 5

What is revenue like for firms with downward sloping demand?

Answer 5

Price decreases as output increases, downward sloping AR curve. They are in imperfect competition and firms have some price setting power.

Question 6

How is elasticity linked to MR for firms with downward sloping demand curves?

Answer 6

• if MR is positive, when the firms sells the product at a lower price, total revenue still increase so the demand curve is elastic, until MR=0
• if MR is negative, TR decreases as price decreases and the demand curve is inelastic, after MR=0
• when MR=0, TR is maximised and demand curve is unit elastic