2a. Revenue

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)

Average Revenue (AR) curve

**Remember:** when drawing an AR curve, you must ensure your curve starts from the **price axis**.  

Marginal Revenue (MR)

MR = ∆TR/∆Q

Marginal revenue is the additional revenue from selling **one** extra unit.

Marginal Revenue (MR) curve

The MR curve must:

1. Start at the same point as AR

2. Cross the Q axis at half the quantity AR crosses at

3. MR should end at the same quantity that AR ends at

An important fact about the Marginal Revenue (MR) curve:

As price decreases and quantity increases, MR decreases.

MR decreases from positive to negative.

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.

Total Revenue (TR) curve?

When MR is **positive**, TR will **increase** as quantity increases.

When MR is **negative**, TR will **decrease** as quantity increases.

So the TR curve is **increasing** when MR is **positive** and the TR curve is **decreasing** when MR is **negative**.

PED changes along the demand curve?

At **high** prices, demand is **elastic** because a % change in price will have a **big** impact, so consumers will be **very responsive.**

E.g. 10% of £1000 = **£100** 

At **low** prices, demand is **inelastic** because a % change in price will have a **small** impact, so consumers will be **unresponsive.**

E.g. 10% of £10 = **£1**

PED and Marginal Revenue (MR)?

When MR is **positive,** demand will be **elastic.**

When MR is **0**, demand will be unitary **elastic.**  

When MR is **negative**, demand will be **inelastic.** 

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.** 

Complete the table

Model Ans.

At what level of output will marginal revenue equal zero?

Marginal revenue is the revenue gained from selling one **extra** unit. At a quantity of 3 units, total revenue is 12 and this remains at 12 when one more unit is sold. So at a quantity of 4 units, marginal revenue is 0 (12 -12).

Complete the following table

Model Ans.

Over what range of output is total revenue increasing?

Model Ans.

The graph shows the demand and marginal revenue schedules for a company selling books.

What is the price when marginal revenue equals zero?

Marginal revenue equals zero at a quantity of 3. To work out price at a quantity of 3 you need to go up to the demand curve and across to the price axis. Price is £4.

At a high price of £159, is demand for Apple Airpods likely to be elastic or inelastic? Why is this?

A given percentage of a higher price will lead to a larger decrease in the actual price and this will then have a larger impact on demand. And so it is elastic.

As price decreases, demand will:

As price decreases and quantity increases, demand will go from elastic to unitary elastic to inelastic. So demand will become **more inelastic**.

This is because at low quantities and high prices, a % change in price will have a big impact so demand will be elastic. Whereas at lower prices, a % change in price will have a smaller impact, so demand will be inelastic. 

If MR is positive, demand will be:

Demand is **elastic** when prices are higher and this is where marginal revenue is **positive**.

Is demand elastic, inelastic or unitary when total revenue is decreasing?

Inelastic

The diagram shows that when total revenue is **increasing**, marginal revenue is **positive** and demand is **elastic**.