The Revenue of a Firm

Question 1

Revenue is the Money firms recieve from Selling their Goods or Services

Answer 1

Total Revenue = total amount of money recieved, in a time period, from a firm’s sales/
- Total revenue is = to the total quantity (q) sold multiplied by the price (P). Its also called turnover. It can be found using the formula: TR = Q x P
- Average revenue (AR) = the revenue per unit sold
Average revenue is TR divided by quantity sold (so average price = price): AR = TR/Q
- Marginal revenue (MR) is the extra revenue recieved as a result of selling the final unit of output
Marginal revenue is the difference between TR at the new sales level (TRn) and TR at one unit less (TRn-1): MR = TRn - TR n-1
LOOK AT TABLE ON PAGE 48

Question 2

A firms Demand Curve determines how Revenue relates to output

Answer 2

• Demand curves show what quantity of a product a firm will be able to sell at a particular price
• Price = average revenue, so the same curve shows the relationship between quantity sold and average revenue. (demand labelled AR)
• A firm’s total revenue is given by quantity x price. TR at price P1 is shown by the shaded area
• ON THE DIAGRAM ON PAGE 48*

Question 3

A firm thats a Price Taker has a Perfectly Elastic Demand Curve

Answer 3

• A firm’s thats a price taker has no power to control the price it sells at - price takers have to accept the price set by a market.
• A price taker’s demand curve will be completely flat - demand is perfectly elastic. If the firm increases the price then the quantity sold will drop to zero. And there’s no reason to decrease the price because the same quantity would sell at the original higher price
• LOOK AT DIAGRAM PG 48*

Question 4

With a Perfectly Elastic demand curve AR = MR

Answer 4

1. When demand is perfectly elastic the price is the same, no matter what the output level.
2. In this case marginal revenue = average revenue, because each extra unit sold brings in the same revenue as all the others.
3. When average revenue is constant, total revenue increases proportionally with sales, as in the diagram on the right
   * LOOK AT DIAGRAM PG 48*

Question 5

A firm that’s a Price Maker has a Downward Sloping Demand Curve

Answer 5

Price makers have some power to set the price they sell at

A price maker’s demand curve will slope downwards - to increase sales the firm must reduce the price.

Question 6

With a Downward Sloping Demand Curve TR is maximised when PED = -1

Answer 6

1. If a firm’s demand curve is a straight line sloping downwards then price elasticity of demand (PED) will change depending on where the firm is operating on the curve
2. LOOK AT DIAGRAMS ON PG 49
   - At the midpoint of the demand curve PED = -1
   - To the left of the midpoint, demand is elastic, so decreasing a product’s price towards the mid point will cause a more than proportionate increase in sales and total revenue will increase.
   - To the right of the midpoint, demand is inelastic, so decreasing a product’s price below the price at the midpoint will cause a less than proportionate increase in sales and total revenue will decrease
   - Total revenue is maximised when the firm is operating at the midpoint of the demand curve - when PED = -1

Question 7

And MR = 0 when TR is at its Maximum

Answer 7

1. The demand curve is also the average revenue curve
2. So the maximum total revenue occurs at the midpoint of the average revenue curve
3. The MR curve is always twice as steep as the AR curve.
4. When total revenue is at its maximum, MR = 0. (At the point where additional sales reduce total revenue, marginal revenue becomes negative).
   * LOOK AT DIAGRAMS*