3.3.1 Revenue

Formulae to calculate total revenue

price x quantity sold

Formulae to calculate average revenue

AR = Total revenue / quantity sold = PQ/Q = P

• the revenue made per unit sold

• Demand is also known as average revenue (AR)

  • This is because AR (& also MR) tend to be downward sloping like the demand curve due to the need for firms to lower prices to increase sales

Formulae to calculate marginal revenue

• MR = change in TR / change in Q = change in PQ/change in Q = P = AR

• Therefore, AR = MR = P

• It’s the change in total revenue from selling one more unit of output

Price elasticity of demand & its relationship to revenue concepts (calculation required)

• Calculation: PED=change in percentage of QD / change in percentage in price (ignore signs)

• When plot the TR curve against the PED curve it will be like in the image:

• According to the graph in the image:

  • If PED is elastic, reduce price to increase revenue

  • If PED in inelastic, increase price to increase revenue

• When answering a question on this (3 marker + mcq): Draw the graph & label range of operation tailored to the answer

Points to remember when drawing revenue curve (MR, TR & AR)

• Label AR = D

• When MR more than 0, TR increases

• When MR = 0, TR maximized

• When MR less than 0, TR decreases

• MR has twice the gradient of AR

1) Draw AR 45 degrees

2) Find half of that distance - intersection of MR with x-axis