1. Revenue and
Profit

2. Revenue Defining total, average and marginal revenue
TR = P × Q
AR = TR / Q
MR = TR / Q
Revenue curves when firms are price takers (horizontal demand curve)
average revenue (AR)
marginal revenue (MR) 13

3. Deriving a firm’s AR and MR: price-taking firm
AR, MR (£) Pe D O O
Q (millions)
Q (hundreds)
(a) The market
(b) The firm

4. Deriving a firm’s AR and MR: price-taking firm
AR, MR (£)
D = AR
= MR Pe D O O
Q (millions)
Q (hundreds)
(a) The market
(b) The firm

5. Revenue Defining total, average and marginal revenue
TR = P × Q
AR = TR / Q
MR = TR / Q
Revenue curves when firms are price takers (horizontal demand curve)
average revenue (AR)
marginal revenue (MR)
total revenue (TR) 13

6. Total revenue for a price-taking firm
Quantity
(units)
Price = AR
= MR (£)
200
400
600
800
1000
1200 5
TR (£)
Quantity

7. Total revenue for a price-taking firm
Quantity
(units)
Price = AR
= MR (£) TR
(£)
200
400
600
800
1000
1200 5
1000
2000
3000
4000
5000
6000
TR (£)
Quantity

8. Total revenue for a price-taking firmTR
Quantity
(units)
Price = AR
= MR (£) TR
(£)
200
400
600
800
1000
1200 5
1000
2000
3000
4000
5000
6000
TR (£)
Quantity

9. Total revenue for a price-taking firmTR
TR (£)
Quantity

10. Revenue
Revenue curves when price varies with output (downward-sloping demand curve)
average revenue (AR)
marginal revenue (MR) 14

11. AR and MR curves for a firm facing a downward-sloping demand curveQ
(units)
P =AR
(£) 1 2 3 4 5 6 7 8 7 6 5 4 3 2
AR, MR (£) AR
Quantity

12. AR and MR curves for a firm facing a downward-sloping demand curveQ
(units)
P =AR
(£) TR
(£) MR
(£) 1 2 3 4 5 6 7 8 7 6 5 4 3 2 8 14 18 20 6 4 2 -2 -4
AR, MR (£) AR
Quantity MR

13. Revenue
Revenue curves when price varies with output (downward-sloping demand curve)
average revenue (AR)
marginal revenue (MR)
total revenue (TR) 14

14. TR curve for a firm facing a downward-sloping D curve
Quantity
(units) 1 2 3 4 5 6 7
P = AR
(£) 8 TR 14 18 20
TR (£)
Quantity

15. TR curve for a firm facing a downward-sloping D curve
Quantity
(units)
P = AR
(£) TR
(£)
TR (£) 1 2 3 4 5 6 7 8 7 6 5 4 3 2 8 14 18 20
Quantity

16. Revenue
Revenue curves when price varies with output (downward-sloping demand curve)
average revenue (AR)
marginal revenue (MR)
total revenue (TR)
revenue curves and price elasticity of demand 14

17. AR and MR curves for a firm facing a downward-sloping demand curve
Elastic
Elasticity = -1
Inelastic
AR, MR (£) AR
Quantity MR

18. TR curve for a firm facing a downward-sloping D curve
Elasticity = -1
Elastic
Inelastic TR
TR (£)
Quantity

19. Revenue
Revenue curves when price varies with output (downward-sloping demand curve)
average revenue (AR)
marginal revenue (MR)
total revenue (TR)
revenue curves and price elasticity of demand
Shifts in revenue curves 14

20. Profit Maximisation Using total curves
maximising the difference between TR and TC 15

21. Finding maximum profit using total curves
TR, TC, TP (£)
Quantity

22. Finding maximum profit using total curvesTR
TR, TC, TP (£)
Quantity

23. Finding maximum profit using total curvesTC TR
TR, TC, TP (£)
Quantity

24. Profit Maximisation Using total curves
maximising the difference between TR and TC
the total profit curve 15

25. Finding maximum profit using total curvesTC TR
TR, TC, TP (£)
Quantity TP

26. Finding maximum profit using total curvesTC b TR a
TR, TC, TP (£) c d
Quantity TP

27. Finding maximum profit using total curvesTC d e TR
TR, TC, TP (£) f
Quantity TP

28. Profit Maximisation Using total curves
maximising the difference between TR and TC
the total profit curve
Using marginal and average curves 15

29. Profit Maximisation Using total curves
maximising the difference between TR and TC
the total profit curve
Using marginal and average curves
stage 1: profit maximised where MR = MC 15

30. Finding the profit-maximising output using marginal curves
Costs and revenue (£)
Quantity

31. Finding the profit-maximising output using marginal curvesMC
Costs and revenue (£)
Quantity

32. Finding the profit-maximising output using marginal curvesMC
Costs and revenue (£)
Profit-maximising
output e
Quantity MR

33. Profit Maximisation Using total curves
maximising the difference between TR and TC
the total profit curve
Using marginal and average curves
stage 1: profit maximised where MR = MC
stage 2: using AR and AC curves to measure maximum profit 15

34. Measuring the maximum profit using average curvesMC
Costs and revenue (£)
Quantity MR

35. Measuring the maximum profit using average curvesMC
Costs and revenue (£) AR
Quantity MR

36. Measuring the maximum profit using average curvesMC
Total profit =
£1.50 x 3 = £4.50 AC a
Costs and revenue (£)
6.00
4.50
T O T A L P R O F I T b AR
Quantity MR

37. Profit Maximisation Some qualifications What if a loss is made?
long-run profit maximisation
the meaning of 'profit'
What if a loss is made?
loss minimising: still produce where MR = MC 16

38. Loss-minimising outputMC
Loss-minimising output AC AR MR AC
LOSS Q
Costs and revenue (£) AR O
Quantity

39. Profit Maximisation Some qualifications What if a loss is made?
long-run profit maximisation
the meaning of 'profit'
What if a loss is made?
loss minimising: still produce where MR = MC
short-run shut-down point: P = AVC 16

40. The short-run shut-down pointAC
The short-run shut-down point
AVC AR
P =
AVC
Costs and revenue (£) Q O
Quantity

41. Profit Maximisation Some qualifications What if a loss is made?
long-run profit maximisation
the meaning of 'profit'
What if a loss is made?
loss minimising: still produce where MR = MC
short-run shut-down point: P = AVC
long-run shut-down point: P = LRAC 16