3.3 revenue, costs and profits

total revenue

the total amount of revenue earned from the sale of goods and services

• quantity x price

average revenue

the revenue earned per unit of output sold

• total revenue/output

marginal revenue

the revenue a firm receives from selling each additional unit of output 

• change in total revenue/change in output 

what happens when marginal revenue is positive on cost and revenue diagram

total revenue still grows when the firm sells the product at a lower price

• the demand curve is elastic

what happens when marginal revenue is negative on a cost and revenue diagram

total revenue falls as the price falls or output rises 

• the demand curve is inelastic 

what happens when marginal revenue =0 on a cost and revenue diagram

total revenue is maximised

• the demand curve is unitary elastic

the relationship between demand and total revenue, in relation to PED

as total revenue rises, marginal and revenue costs fall but at a slower rate

total cost

the cost of producing a given level of output

• fixed and variable costs

total fixed cost 

costs that don’t change with output/remain constant 

• e.g rent, machinery 

total variable costs 

costs that change directly with output 

• e.g materials 

marginal cost 

the extra cost of producing one additional unit of output 

• change in total cost/change in output 

short run 

the length of time when at least one FoP is fixed/cannot be changed 

law of eventually diminishing returns

productivity increases as more variable costs are added e.g extra workers (capital)

average fixed cost curve

as output increases, AFC falls as the same amount is divided by a larger output

average total cost 

• U-shaped due to the law of eventually diminishing returns 

• costs fall initially as machinery used increased efficiency and productivity but then overcrowding then causes costs to rise again 

marginal cost

• U-shaped due to the law of eventually diminishing returns 

• marginal cost initially falls as machinery is used efficiently 

• eventually begins to rise as resources become more scarce 

• always cuts the average cost curve at its lowest point 

• still rise when average cost is falling, as long as marginal cost is below AC  

LRAC curve

• a movement along this curve is due to a change in output- changes average cost of production

• a shift in this curve occurs due to external economies/diseconomies of scale, taxes, technology etc

minimum efficient scale

the minimum level of output needed for a builder to fully exploit economies of scale