revenue Flashcards
what is revenue?
the money flowing into a business over a given time period from selling goods and services in market
how do you calculate TR?
total revenue (TR)= Price x Quantity
how do you calculate AR?
Average revenue (AR)= P x Q/ Q (same value as Price)
what hat is marginal revenue
marginal revenue (MR)= extra revenue from selling one more unit
how do you calculate MR?
MR= change in TR/ change in Q
what does it mean if MR is greater than 0?
elastic demand
what does it mean if MR is less than 0?
inelastic demand
what does it mean if MR is equal to 0?
demand is unitary elastic
what does the demand curve equal to?
Demand curve= average revenue curve
why can MR be negative?
MR can be negative because once you go past a point, selling another unit may decrease revenue
when is firms revenue maximised and why?
- a firms revenue is maximised at the point where marginal revenue is 0
because revenue gained from selling another unit is nothing
extra customers doesnt compensate for the cut in price
what happens to the C/R diagram if theres a rise in demand
price and quantity will rise
profits will rise→ cant show this on a demand/supply diagram
- so AR curve will shift to the right, so the MR curve will shift aswell
- to find new quantity → find where new MR=MC
- then follow this quantity up to where it meets the AR curve to find the price that the firm will sell at
- for new profit - follow down from AR to where it meet AC
how should you go about drawing shift in the C/R diagram
draw original C/R diagram
figure out which curves would shift depending on the change that is occuring -> think about what you would do for a regular theme 1 supply/demand diagram and what shifts would occur and translate that into a C/R diagram
what will happen to the C/R diagram if theres a rise in variable cost
- draw original C/R diagram
- would shift the cost curves → shift MC inwards and AC upwards to show a rise in costs
- find new quantity new MC=MR (profit maximising point) and find where it cuts the new AC curve
- price from the AR curve
- profit is the difference between the new AC and AR
what happens to the C/R diagram if theres a rise in fixed costs
- MC curve doesn’t change so the profit maximising point hasn’t changed
- AC curve shifts upwards as AC takes into account all costs
- new cost is where quantity meets AC
- new profit is the difference between AR and AC → area of that rectangle
- quantity and price stays the same
