Revenue Flashcards
What is Average Revenue?
Average revenue is equal to price.
The formula for total revenue is: TR=PXQ
Dividing a total by quantity will give average. Therefore, TR/Q=AR Therefore, AR=Price.
As AR=Price, we can relabel the demand curve as the AR curve.
This is because demand is the amount that consumers are willing and able to consume at different prices.
Therefore, demand is also the amount consumers are willing and able to consume at different average revenues.
What is Marginal Revenue?
The margin is the next unit not yet produced/utilised.
Revenue is income.
Marginal revenue is the revenue gained from selling one more unit.
Therefore, marginal revenue is the price of the next unit produced and sold.
In a downward sloping demand curve, the MR curve is always twice the slope.
At any given AR, the MR is half the quantity.
What happens with a perfectly elastic AR (Demand) Curve in terms of MR?
With a perfectly elastic AR (demand) curve, price does not drop to sell additional units.
Therefore, my current price (AR) is equal to my next price (MR).
Therefore, AR=MR.
What is the relationship between AR, MR, and PED?
MR will tell us where exactly the price and output where total revenue is maximised.
If PED is 1, any deviation in price and output would reduce total revenue.
Therefore, price above revenue maximisation price are elastic and price below are inelastic.
If MR is negative (below the origin in the price axis), then going to the margin will reduce total revenue as we will be adding a negative revenue to the total.
If increasing quantity sold by reducing price decreases total revenue, then the Ped has to be inelastic.
What does a positive MR mean?
If MR is positive (above origin in the price axis) then going to the margin means that total revenue increases.
If TR increases by decreasing price and increasing output, then the Ped must be elastic.
What does an MR at 0 mean?
If MR equals zero, then going to the margin will not increase total revenue.
At MR=0, total revenue is maximised as adding more units will not add to the total revenue.
Therefore, MR=0 is the point where Ped=1.
What does a Negative MR mean?
If MR is negative (below the origin in the price axis), then going to the margin will reduce total revenue as we will be adding a negative revenue to the total.
If increasing quantity sold by reducing price decreases total revenue, then the Ped has to be inelastic.
