Module 6 - Revenue And Profit

Question 1

Total revenue (TR)

Answer 1

A firm’s total earnings from a specified level of sales within a specified period: TR = P x Q.

Question 2

Average revenue (AR)

Answer 2

Total revenue per unit of output. When all output is sold at the same price, average revenue will be the same as price: AR = TR / Q = P.

Question 3

Marginal revenue

Answer 3

The extra revenue gained by selling one or more unit per time period: MR = ΔTR / ΔQ.

Question 4

Price taker

Answer 4

A firm that is too small to be able to influence the market price.

Question 5

Price maker (or price chooser)

Answer 5

A firm that has the ability to influence the price charged for its good or service.

Question 6

Relationship between elasticity and revenue for a firm with a downward-sloping demand curve

Answer 6

• If marginal revenue is a positive figure, the demand curve will be elastic at that point, since a rise in quantity sold would lead to a rise in total revenue.
• If marginal revenue is negative, the demand curve will be inelastic at that point, since a rise in quantity sold would lead to a fall in total revenue.

Question 7

Normal profit

Answer 7

The opportunity cost of being in business. It consists of the interest that could be earned on a riskless asset, plus a return for a risk - taking in this particular industry. It is counted as a cost of production.

Question 8

Supernormal profit

Answer 8

(Also known as pure profit, economic profit, abnormal profit or simply profit)
The excess of total profit above normal profit.

Question 9

Short-run shut-down point

Answer 9

This is where the AR curve is tangential to the AVC curve. The firm can only just cover its variable costs. Any fall in revenue below this level will cause a profit-maximising firm to shut down immediately.

Question 10

Long-run shut down point

Answer 10

This is where the AR curve is tangential to the LARC curve. The firm can just make normal profits. Any fall in revenue below this level will cause a profit-maximising firm to shut down once all costs have become variable.

Question 11

Explain how a firm decides whether or not to produce in the short run and the long run

Answer 11

Short run: The firm should continue to produce in the short run provided it can cover its variable costs, ie provided that average revenue exceeds average variable cost, so it is making some contribution to its fixed costs.
Long run: In the long run all costs are variable and so the firm will shut down if it cannot cover its total costs.