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Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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Presentation on theme: "Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when."— Presentation transcript:

1 Revenue and Profit 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)

3 O O Price (£) AR, MR (£) Q (millions)Q (hundreds) PePe S D (a) The market(b) The firm Deriving a firms AR and MR: price-taking firm

4 O O Price (£) AR, MR (£) PePe S D D = AR = MR Q (millions)Q (hundreds) (a) The market(b) The firm Deriving a firms AR and MR: price-taking 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)

6 Total revenue for a price-taking firm TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555

7 TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555 TR (£) 0 1000 2000 3000 4000 5000 6000 Total revenue for a price-taking firm

8 TR TR (£) Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 55555555555555 TR (£) 0 1000 2000 3000 4000 5000 6000 Total revenue for a price-taking firm

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

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

11 AR and MR curves for a firm facing a downward-sloping demand curve Q (units) 12345671234567 P =AR (£) 87654328765432 AR AR, MR (£) Quantity

12 Q (units) 12345671234567 P =AR (£) 87654328765432 TR (£) 8 14 18 20 18 14 MR (£) 6 4 2 0 -2 -4 MR AR, MR (£) Quantity AR AR and MR curves for a firm facing a downward-sloping demand curve

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

14 TR curve for a firm facing a downward-sloping D curve Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14

15 TR Quantity TR (£) Quantity (units) 12345671234567 P = AR (£) 87654328765432 TR (£) 8 14 18 20 18 14 TR curve for a firm facing a downward-sloping D curve

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

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

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

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

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

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

22 TR, TC, T (£) TR Quantity Finding maximum profit using total curves

23 TR, TC, T (£) TR TC Quantity Finding maximum profit using total curves

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

25 TR, TC, T (£) T TR TC Quantity Finding maximum profit using total curves

26 TR, TC, T (£) T TR TC a b c d Quantity Finding maximum profit using total curves

27 TR, TC, T (£) T TR TC d e f Quantity Finding maximum profit using total curves

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

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

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

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

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

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

34 Quantity Costs and revenue (£) Measuring the maximum profit using average curves MR MC

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

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

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

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

39 Profit Maximisation Some qualifications –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

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

41 Profit Maximisation Some qualifications –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


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