2a. Revenue

Total Revenue (TR)

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.