4.1.4.6 Marginal, average and total revenue Flashcards
What is total revenue (TR)?
Total revenue is the total income a firm receives from selling a given quantity of goods or services. It is calculated as:
TR = Price × Quantity Sold
What is average revenue (AR)?
Average revenue is the revenue earned per unit sold. It is calculated as:
AR = Total Revenue / Quantity Sold
AR is equal to the price of the good.
What is marginal revenue (MR)?
Marginal revenue is the additional revenue earned from selling one more unit of output. It is calculated as:
MR = ΔTotal Revenue / ΔQuantity Sold
Why is the average revenue curve the firm’s demand curve?
The average revenue curve is the firm’s demand curve because AR represents the price per unit, which reflects the quantity consumers are willing to buy at each price level.
What is the relationship between average revenue and marginal revenue?
When demand is perfectly elastic, MR = AR. In imperfectly competitive markets, MR < AR because firms must lower prices to sell additional units.
What is the relationship between marginal revenue and total revenue?
Marginal revenue measures the change in total revenue when one more unit is sold. If MR is positive, TR increases. If MR is negative, TR decreases.
What does a horizontal AR curve indicate?
A horizontal AR curve indicates that the firm is a price taker in a perfectly competitive market, where demand is perfectly elastic.
How is profit calculated?
Profit is calculated as:
Profit = Total Revenue − Total Costs
What is the shape of the AR curve in a perfectly competitive market?
In a perfectly competitive market, the AR curve is horizontal, indicating that the firm can sell any quantity at the market price.
What is the shape of the AR curve in an imperfectly competitive market?
In an imperfectly competitive market, the AR curve is downward-sloping, indicating that the firm must lower prices to sell more units.
How does marginal revenue affect total revenue?
If MR > 0, TR increases as more units are sold. If MR = 0, TR is maximized. If MR < 0, TR decreases as more units are sold.
What is the relationship between AR, MR, and demand elasticity?
In perfectly elastic demand, MR = AR. In imperfectly elastic demand, MR < AR, as firms must lower prices to sell additional units.
What is the significance of the AR curve for a firm?
The AR curve shows the price a firm can charge for its product at different levels of output, reflecting consumer demand.
How is marginal revenue calculated?
Marginal revenue is calculated as:
MR = ΔTotal Revenue / ΔQuantity Sold
What happens to total revenue when MR is zero?
When MR = 0, total revenue is maximized because selling additional units does not increase revenue.
What is the relationship between MR and TR in a perfectly competitive market?
In a perfectly competitive market, MR = AR = Price, and TR increases linearly with quantity sold.
What is the relationship between MR and TR in a monopoly?
In a monopoly, MR < AR, and TR increases at a decreasing rate until MR = 0, after which TR decreases.
Why does MR decrease as output increases in imperfect competition?
MR decreases because firms must lower prices to sell additional units, reducing the revenue gained from each extra unit sold.
What is the relationship between AR and price?
AR equals the price of the good because AR is calculated as total revenue divided by quantity sold, which is the price per unit.
How does the AR curve reflect consumer demand?
The AR curve reflects consumer demand because it shows the price consumers are willing to pay for different quantities of the good.
What is the difference between TR, AR, and MR?
TR: Total income from sales.
AR: Income per unit sold (price).
MR: Income from selling one more unit.
What is the significance of MR = 0?
When MR = 0, total revenue is maximized because selling additional units does not increase revenue.
How does the AR curve differ between perfect and imperfect competition?
Perfect competition: AR curve is horizontal (MR = AR).
Imperfect competition: AR curve is downward-sloping (MR < AR).
What is the relationship between MR and profit maximization?
Firms maximize profit by producing the quantity where MR = MC (marginal cost). At this point, the revenue from the last unit sold equals the cost of producing it.
