Revenue Flashcards
Total revenue
Refers to all the money they are getting for seeking all of their goods.
Total revenue = Quantity x price
Average revenue
The money that they get from selling each product.
Average revenue = (Total revenue)/(Output)
Marginal revenue
The extra money businesses receive from one more customer/selling one more unit of output
What are the 2 possibilities to a businesses revenue when it sells more output?
1) the business is a price taker from the market as a whole.
This means the business has no control over its price. It will tend to happen when the market is very competitive. In this situation, businesses can sell as much as they want, if they are willing to accept the market price. In this situation, their demand curve will be perfectly horizontal.
2) the demand curve is sloping, meaning a business cannot just sell as much as it wants at a constant price, but to sell more it will have to lower its price for all new and existing customers. Therefore, as a business sells more, it’s marginal revenue will be falling, and it’s total revenue will be going up at a declining rate. When MR = 0, TR is at its highest.
PED
Price elasticity of demand looks at the effects of changes in price on the demand for a good.
PED = (% change in QD)/(% change in price)
How does PED affect the demand curve?
- If demand changes by a bigger percentage than price, then the price elasticity of demand is said to be price elastic
- If demand changes by a smaller amount than price, we say demand is price in elastic
- For any straight line, downwards sloping demand curve, the price elasticity of demand gets lower and lower the further we more down the demand curve.
How does PED change as we move down the demand curve?
Percentage change in demand will fall and percentage change in price will increase. Because of this, the demand is going to become less price elastic
When Marginal revenue = 0, what is PED?
When MR=0, PED = -1.
When MR >0, PED > -1 (elastic)
When MR<0, PED < -1 (inelastic)
