Revenue Flashcards
Total Revenue (TR)
Total Revenue = Price x Quantity TR = P x Q Total revenue is total amount of money a firm receives from its sales.
Average Revenue (AR)
AR = TR/Q If we simplify this formula, we find that Average Revenue = Price (AR = P)
Marginal Revenue (MR)
MR = ∆TR/∆Q Marginal revenue is the additional revenue from selling one extra unit.
As quantity increases, TR will continue to increase, as long as:
If MR is positive, selling an additional unit will increase TR. So increasing quantity will indeed increase TR.
Marginal Revenue (MR) and Total Revenue (TR) relationship
When MR is positive, TR will increase as quantity increases. When MR is negative, TR will decrease as quantity increases.
Revenue maximisation
A firm’s total revenue is maximised when MR = 0 (no more revenue can be gained at this point).
Revenue maximising price
A firm’s total revenue is maximised when MR = 0, at quantity Q1, so the price is P1.
When marginal revenue equals zero…
Total revenue is maximised when marginal revenue equals zero and demand is unitary.
