4.1.4.6 - Marginal, Average and Total Revenue Flashcards
What is total revenue?
All the money received by a firm from selling its total output.
What is average revenue?
Total revenue divided by the output.
What is marginal revenue?
Addition to total revenue resulting from the sale of one more unit of the product.
What is the equation for average revenue?
Total revenue / Output = Average Revenue.
What is marginal revenue?
∆Total Revenue / ∆ Output = Marginal Revenue.
What is the relationship between price charged and average revenue?
The price charged is always equal to the average revenue.
What is perfect competition?
A market that contains the 6 conditions: large number of buyers and sellers, ability to buy/sell as much as desired at the market price, inability of an individual buyer/seller to influence the price, homogeneous product, no barriers to entry/exit in the long run.
What is a monopoly?
One firm only in a market.
Where are monopolies present in the real world?
Nationalized services.
What types of countries are monopolies seen?
Communist countries.
What do marginal and average curves plotted from the same data always display?
When marginal is greater than the average, the average rises. When marginal is equal to the average, the average does not change. When marginal is less than the average, the average falls.
What does a firm’s revenue curves depend on in a market?
The competitiveness of the market.
Marginal and average revenue curves remain constant across monopolies or perfect competition markets. T/F?
False, they are different across the two market types.
What are the characteristics of a perfectly competitive market?
Large number of buyers and sellers, perfect information, homogeneous products, no barriers to entry or exit.
What type of demand is found in a perfectly competitive market?
Perfectly elastic demand.
What is the relationship between the average revenue curves and marginal revenue curves in perfect competition?
The price set by the market is taken by individual firms.
What tends to happen in terms of firm size within perfectly competitive markets?
They are very small price takers.
Why should firms within perfectly competitive markets not lower or raise their price?
They do not benefit from extra sales, as there is infinite demand at the given price.
Why is a firm within a perfectly competitive market a price taker?
A perfectly competitive firm can sell whatever quantity it wishes at the ruling market price, but cannot influence the price by its own actions.
What does a horizontal demand curve mean in terms of average revenue and marginal revenue in a perfectly competitive market?
Demand is equal to the Average Revenue and the Marginal Revenue.
What is a price-maker?
A firm faces a downward-sloping demand curve for its product and has the market power to set the price.
What is a quantity setter?
A firm faces a downward-sloping demand curve and has the market power to set the quantity of the good it sells.
What does a sloping downwards demand curve mean within a monopoly?
The demand curve is equal to the Average Revenue curve.
Why is a sloping downwards demand curve equal to the AR curve within a monopoly?
A single price is charged for all goods sold, so average revenues are equal to the price and therefore equal to the demand curve.
What does being a price-maker mean in terms of monopolistic firms?
The individual firm sets the price at which the product is sold, and the demand curve dictates the maximum output that can be sold at this price.
What does being a quantity-setter mean in terms of monopolistic firms?
The demand curve dictates the maximum price at which a chosen quantity can be sold.
A firm cannot be a price-maker and quantity-setter at the same time. T / F?
True. (but sometimes not)
Why is marginal revenue and average revenue not the same in a monopoly?
As the marginal value of the variable is less than the average value, the average value falls.
Why does average revenue fall in a monopoly?
A monopolistic firm must drop prices to raise quantity demanded, so average revenue per product falls.
Why must the marginal revenue of a monopoly be below the average revenue curve?
The demand curve falls as output increases, meaning the marginal revenue curve must be below the average revenue curve.
What is the in-depth relationship between AR and MR curves in a monopoly?
The MR curve is below the AR curve and is also twice as steep compared to the AR curve.
How will total revenue change based on the change in price?
It depends on the specific context and price change.
How does average revenue change based on the change in price?
It depends on the specific price change.
How does marginal revenue change based on the change in price?
It depends on the specific price change.
Why does a perfectly competitive market have the same perfectly elastic demand curve?
Substitutability. Availability of substitutes ensures infinite demand at the ruling market price.
How is price elasticity demonstrated in a straight downward sloping line of a monopoly?
Demand for the monopolist’s output is elastic in the top half of the curve, becoming unit elastic halfway down, and inelastic on the bottom half.
What does marginal revenue measure?
The change in total revenue that stems from an increase in the quantity of goods sold.
How can marginal revenue be shown on a total revenue curve?
The total revenue curve becoming steeper indicates increasing marginal revenue.
What is revenue?
The money a firm earns from selling its product.
What is total revenue?
All the money a firm earns from selling the total output of a product.
What is average revenue?
Total revenue / size of output.
What is marginal revenue?
The addition to total revenue resulting from the sale of one more unit of a product.
What is the relationship between the demand curve and the average revenue curve?
They are the same.
What does the nature of a firm’s revenue depend on?
The competitiveness of the market structure.
What is the relationship between average and marginal revenue curves in perfect competition?
They are both horizontal.
How do average revenue curves slope in a monopoly?
They slope downwards.
Where does a marginal revenue curve lie on an average revenue curve in a monopoly?
Below the average revenue curve, with the gradient being twice as steep.
What is the equation for Average Revenue?
Total Revenue / Output or Quantity.
What is the equation for Marginal Revenue?
ΔTotal Revenue / ΔOutput or ΔQuantity.
What is the equation for Total Revenue?
Price * Quantity or Average Revenue * Quantity.
