3.3.1 Revenue

Spec:

a) Formulae to calculate and understand the relationship between:

• total revenue

• average revenue

• marginal revenue

  
  

  b) Price elasticity of demand and its relationship to revenue concepts (calculation required)

What is revenue? The money flowing into a business over a given time period selling goods and services in a market a.k.a turnover

What is marginal revenue? The change in a firms revenue from selling one extra unit of output

When do you maximise revenue ? When marginal revenue is 0

Revenue = Total Quantity x Price

Av Revenue = TR / Quantity ( just = price )

Marginal Revenue = Change in TR/ Change in Quantity

The relationship between PED and TR

( Red area is bigger than green )

A price decrease when PED is inelastic leads to an increase in TR

A price decrease when PED is inelastic leads to a decrease in TR

When demand in inelastic consumers are less sensitive to a change in price. They have a lot of consumer surplus which businesses can extract into more revenue - perhaps due to price discrimination ( charging diff prices for diff consumers )

Here, a price decrease would decrease TR as marginal revenue would be negative ( after MR = 0 )