4.1.4.6 MARGINAL, AVERAGE AND TOTAL REVENUE

PAST PAPER QUESTIONS IN BOOKLET

Describe the LRAC curve diagram

How to calculate Total Revenue?

Price x Quantity

Where do firms maximize profit?

Where MR = MC

What is the formula for average revenue?

Total revnue / total output sold

What is the formula for marginal revenue?

Change in total revenue / change in output

Define revenue

Money earned by a firms selling its output

Define total revenue

All money earned from selling total output

Define average revenue

Total revenue divided by the size of output

Describe the relationship between average and marginal revenue

• when the marginal is greater than the average, the average rises

• when the marginal is less than the average, the average falls

• when the marginal equals the average, the average is constant, neither rising not falling

What are some characteristics of perfect competition?

• large number of buyers and sellers

• perfect information for all buyers and sellers

• price takers

• homogenous goods

• no barriers to enter or exit the market in the long run

Describe the diagram

How can you describe selling above the market price?

No sales - if products are homogenous in the market, and firms raise prices, consumers will instantly switch to competitors, reducing sales

How do you describe selling below the market price?

No sense - a firm can already sell qualities it wants, but there will be no extra sales (decreases revenue and profit)

In a perfectly competitive market - are firms price takers or makers?

Individual firms are price takers so have no power to influence the market price and can sell any quantities of goods they want at that fixed price

What does the AR and MR curve look like?

A straight vertical line

P = D = AR = MR

Describe the average revenue and marginal revenue in a monopoly diagram

Which is below the other? MR or AR?

The MR must be below the AR curve

MR is twice as steep as AR

What is price setting?

The firm chooses a target price, and the market demand curve dictates how much quantity consumers will buy

What is quantity setting?

The firm restricts/expands output, and the market demand curve determines the maximum price consumers will pay

Marginal revenue gain and loss

How does elasticity change along the demand curve

When is profit maxed?

When MR = MC

What's normal profit?

Normal profit is sufficient to keep firms in the market

It does not attract new firms to the market

Firms not making normal profit leave the market

What's abnormal profit?

Abnormal profit is the extra profit over and above normal profit

Attracts new firms into the market

MCQs

In booklet

What are the 9 roles of profit?

1. Creation of business

2. Workers incentives

3. Shareholder incentives

4. Allocating of resources

5. Efficiency indicator

6. Reward for risk taking

7. Reward for innovation

8. Source of business finance

9. Business stability

What is "creation of business"?

Motives entrepreneurs to take the initial leap to launch a venture

What is "workers incentives"?

Funds performance bonuses and protocol sharing schemes to boost productivity

What is "shareholder incentives"?

Provides dividends and capital growth to keep investors satisfied

What is "allocation of resources"?

Signals high demand industries to guide where capital should flow

What is "efficiency indicator"?

Proves that a firm is managing its operational costs efficiently

What is "reward for risk taking"?

Compensates business owners for risking their financial capital

What is "reward for innovation"?

Validates research investments by generating high financial returns

What is "source of business finance"?

Reinvests retained earnings to expand without taking on debt

What is "business stability"?

Builds cash reserves to survive unexpected economic downturns smoothly