4) Revenue Flashcards
define total revenue
the revenue received by a firm from its sales of a good or service it is the quantity sold, multiplied by the price
define average revenue
the average revenue received by the firm per unit of output; it is total revenue divided by the quantity sold
define marginal revenue
the additional revenue received by the firm if it sells an additional unit of output
why does D=AR?
the average revenue that a firm receives for a given number of sales is equal to the price that leads to those sales
why is MR steeper than the demand curve?
because MR is zero when PED on the demand curve is unitary
when does MR become negative?
MR becomes negative when the price increases lead to lower total revenue; PED is inelastic
D=AR, what is the PED of the midpoint?
-1
on D=AR, is the left of the midpoint elastic or inelastic, why?
To the left of the midpoint PED is elastic because price decreases lead to a proportionately larger increase in quantity demanded - total revenue increases as price falls
on D=AR, is the right of the midpoint elastic or inelastic, why?
To the right of the midpoint PED is inelastic because price decreases lead to a proportionately smaller increase in quantity demanded - total revenue decreases as price falls
when is TR maximised?
TR is maximised when the firm is operating at the midpoint of the demand curve; when PED = -1
when MR = 0, this is the point at which extra sales reduce total revenue
what happens to AR and MR when demand is perfectly elastic?
With a perfectly elastic demand curve AR = MR
when the demand curve is perfectly elastic, why does AR=MR?
AR = MR here because each extra unit sold brings the same revenue as all the previous sales
what happens to TR when AR is constant because its perfectly elastic?
AR is constant, so TR increases proportionately with sales, which is true for firms that are price takers
what do price takers have to do?
Price takers have no market power when setting prices; they accept the market clearing price because there are a large number of firms all making the same good (among other features)
