Marginal, average and total revenue

Question 1

define total revenue and state how it is calculated?

Answer 1

TR is how much money a firm receives from all of its sales in total
- calculation: price x quantity

Question 2

define average revenue and state how it is calculated

Answer 2

AR is how much a business receives on average from each sale
- calculation: TR/Q

Question 3

what is average revenue (AR) equal to

Answer 3

price

Question 4

what is the average revenue curve equal to?

Answer 4

the demand curve

Question 5

define marginal revenue and state the calculation

Answer 5

MR the additional revenue a firm makes from selling one extra unit
- calculation: change in TR/ change in Q

Question 6

what happens when TR=0

Answer 6

total revenue is maximised

Question 7

describe the TR curve

Answer 7

• If MR is positive, selling an additional unit will increase TR. So increasing quantity will indeed increase TR.
• Eventually, TR reaches 0. This means TR is maximised. TR cannot increase any further
• If we go beyond this quantity, MR is negative. Selling an extra unit will lead to a decrease in extra revenue. Total revenue will decrease until back to 0.

Question 8

describe how to draw the MR curve

Answer 8

1. MR curve starts at the same point as the AR curve
2. But reaches the quantity axis at half the quantity of AR
3. MR should stop at the same quantity as AR

Question 9

what happens to the TR curve when MR increases

Answer 9

when MR is positive, TR will increase

Question 10

what happens to TR curve when MR is negative

Answer 10

when MR is negative, TR will decrease

Question 11

state how price elastic demand affects the total revenue curve when there is and increase and decrease in price

Answer 11

• Increasing price by some percentage (even by a little amount) will decrease quantity demanded by an even bigger amount = total revenue decreases overall
• decreasing price by some percentage (even a little amount), QD will increase by an even larger percentage = decreasing the price will increase total revenue

Question 12

state how price inelastic demand affects the total revenue curve when there is and increase and decrease in price

Answer 12

• if price increases by some percentage (even by a little), quantity demanded will decrease by a smaller percentage (only loose a small number of customers) = will increase TR
• price decreasing by some percentage (even by a little), QD will increase but by less than price - overall TR will fall

Question 13

does PED change along our demand curve, yes or no

Answer 13

yes

Question 14

why does PED change along our demand curve?

Answer 14

• At higher prices a percentage change in price will have a higher impact - consumers will respond more and demand will be elastic
• At lower prices consumers will not respond as much and demand will be more inelastic Because at lower prices, percentage change in price will have a smaller impact