A2 Economics – Unit 3 – Business economics and economic efficiency Unit 3 develops from Unit 1, but is much more focused on how the pricing and nature of competition between firms is affected by the number and size of market participants. Secondly, there is more consideration of efficiency, as well as pricing and output decisions. You should develop more of a capability to analyse and interpret numbers, calculations and diagrams; as well as Government intervention to promote competitive markets. Finally, you should be able to relate the theoretical framework to real-life examples and have an awareness of the real world.

Revenue Total Revenue (TR) – The total amount of money received from the sale of any given level of output. Average Revenue (AR) – Average receipt per unit sold; total revenue ÷ quantity sold. Marginal Revenue (MR) – The receipts from selling an extra unit of output; the difference between total revenue at different levels of output (shown in tables as in-between).

Revenue curves On the assumption that a firm receives the same price for each good sold… Look at Table 1, p.300. AR must remain constant as the price stays the same, TR increases as sales increase. The MR (extra revenue from each unit sold) is also £5 at all levels of sales. This data can be shown in a revenue curve. In fig. 1, TR is upward sloping. In fig. 2, as the price is always £5, the AR and MR curves are identical and equal to £5. The AR curve is also the Demand curve, as it shows the quantity sold at each average price level (in this case £5).

Revenue curves However, in most cases a firm has to lower its price to achieve higher sales… Table 2 shows that the price falls as sales get larger (basic D theory), as does the AR. When sales reach 6 units, TR also falls, which means that each extra unit sold is making the total go down because of the lower price; therefore negative MR. Fig. 3 shows the TR rising & falling. Fig. 4 shows the AR curve downward sloping, which is also the D curve. The MR curve is twice as steep, as it is exactly half the AR, but plotted at ‘half units’.

Question 1, p. 301.

Revenue and price elasticity If a good is price inelastic, a rise would increase TR, as the % fall in QD is less than the % rise in P. If a good is price elastic, a rise would decrease TR, as the % fall in QD would be proportionately greater than the rise in P. In fig. 3, at sales up to 6 units, D is elastic, as the drop in P is leading to higher TR. At sales above 6 units, D is price inelastic, as falls in P lead to falls in TR. A good is price elastic if MR is positive, as TR is rising; in fig. 4 it becomes inelastic as the curve drops below 0 (negative). The top half of the AR curve is price elastic and the bottom half price inelastic. There is unitary (exactly 1) price elasticity when TR is maximised, MR at 0. This is the most important concept (where MC = MR) in Unit 3!

Finchfield cycles, p.303 Read ‘Revenue maximisation’ Applied Economics case