Revenue

Write the definition of: Total Revenue (TR)

Total Revenue = Price x Quantity

Total revenue is total amount of money a firm receives from its sales.

Write the definition of: Average Revenue (AR)

AR = TR/Q

If we simplify this formula, we find that Average Revenue = Price (AR = P)

Write the definition of: Average Revenue (AR) curve

Write the definition of: Marginal Revenue (MR)

MR = ∆TR/∆Q

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

Write the definition of: 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.

Write the definition of: 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.

Write the definition of: Total Revenue (TR) curve

Write the definition of: 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.

What is the graph for PED changes along the demand curve?

Write the definition of: 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. 

As price decreases, demand will:

become more inelastic

If MR is positive, demand will be:

Demand is elastic along the top half of the curve where marginal revenue is positive.

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

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

As quantity increases, demand will become more

As quantity increases, we move towards the lower half of the demand curve where demand is inelastic not elastic. This is because a change in price at lower prices will have less of an impact on demand.

When marginal revenue is zero, price is halfway along the demand curve so demand is

elastic and total revenue is at its point.

Unitary

Maximum

Write the definition of: Revenue maximisation

A firm’s total revenue is maximised when MR = 0

Write the definition of: Revenue maximising price

A firm’s total revenue is maximised when MR = 0, at quantity Q1, so the price is P1. 

When marginal revenue equals zero...

Total revenue is maximised and demand is unitary.