1. Revenue

2. Lesson Objectives To understand what revenue is To understand the concepts of average, marginal and total revenue To be able to calculate AR, MR and TR To be able to explain the relationship between revenue and elasticity

3. Revenue The income generated from the sale of output in product markets Total Revenue (TR) = Price per unit x quantity sold Average Revenue (AR) = Price per unit = total revenue / output Marginal Revenue (MR) = the change in revenue from selling one extra unit of output

4. Revenue and Price – taking firms A firm which is too small to affect the market price will face a constant price as it changes the number of products it sells So demand for the firms product is ________________ Perfectly elastic MR = AR and both will be constant because when the firm sells an extra unit it will receive the same price

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

6. 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

7. 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

8. Firms facing downward- sloping demand curves Most cases- firms have to lower P to sell more and experience a fall in D if they raise their P AR and MR fall as sales rise Initially MR= AR, but falls below it after one unit (because to sell more the firm has to lower the price of all units) MR can be negative- a fall in P causes D to rise by a smaller % so TR falls

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

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

11. 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 D curve

12. 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

13. 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

14. Revenue Revenue and price elasticity of demand

15. PriceQDTRARMRPED 5000 45290 404160 356210 308240 2510250 2012240 1514210 1016160 51890 0200

16. PriceQDTRARMRPED 5000 45 29045 359 40416040 254 35621035 152.33 30824030 51.5 251025025 51 201224020 -150.67 151421015 -250.43 101616010 -350.25 518905 -450.11 0200

17. Plot the AR and MR curves Note the AR curve is our D curve as AR is equal to price Label the elasticity (i.e. inelastic unitary and elastic) along the AR (=D) curve Plot the TR curve on the graph Relationship between revenue and elasticity? TR is maximised when MR= 0 and PED = 1

18. Revenue (£) Quantity MR AR Inelastic Elastic Unitary

19. Revenue Quantity Elastic +ve MR MR= 0 -ve MR Inelastic Unitary