3.3.1 Revenue Flashcards
What is total revenue?
The total value of all sales a firm incurs
P x Q
What is AR?
Average revenue is the overall revenue per unit
TR / Q = AR
What is MR?
Marginal Revenue (MR) is the additional revenue a firm earns when it sells one more unit of output.
It’s the change in total revenue (TR) from a change in quantity sold.
How do you work out MR?
Change in TR
MR = ……………………………….
Change in Q
What is perfect competition?
A market structure in which individual firms have no market power.
Firms produce identical products, with free entry and exit, and where buyers and sellers have perfect information, resulting in firms being price takers
why is RevMax at MR = 0
Because if MR is higher than 0 then more revenue can be made. Past 0 (negatives) it means revenue is reducing. Again, MR = 0 is just the perfect point where revenue made per unit is maximised until the point where the last unit is making nothing, so you should stop.
In imperfect competition what happens to MR / AR when additional units are sold?
They both fall, but MR 2x as much.
Why is AR the demand curve?
AR = Average Revenue = Revenue for each unit of good sold = average price of each unit = changing AR shows changing price = changing price shows changing demand = AR is downward sloping because as price falls, demand increases (quantity rises)
In perfect competition it is NOT downward sloping
Why is AR not downward sloping in perfect competition?
In perfect competition, since the firm has to accept the market price, AR does not change with quantity. This means the AR curve is horizontal because the price the firm receives remains constant for every unit it sells.
