Revenue Flashcards
What is marginal revenue?
It is the additional amount received from selling an extra unit of output.
What are the laws of revenue?
Where MR=0, Total revenue is at its peak. When MR is negative the total revenue generated will start to decline. The MR curve is twice as steep as the AR curve.
State the laws of the revenue and price elasticity?
When a firm is able to charge a constant price irrespective of output levels, AR=MR=D. This will be illustrated as a horizontal line. This would mean that the demand for the good is perfectly elastic. Therefore, whatever the percentage change in the price of the good, output will be infinity. However, as experienced in a downward sloping demand curve, where the price(AR) of the product needs to be lowered to increase output levels, the elasticity will vary throughout the AR line. Until where TR is maximised the demand for the good is inelastic. Where TR is at its peak, demand is unitary elastic whereas when TR is falling demand is inelastic. In terms of marginal revenue, demand is elastic so long as marginal revenue is positive and demand is inelastic when marginal revenue is negative.
