Revenue and Profit

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

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

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

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

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

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

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

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

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

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

AR and MR curves for a firm facing a downward-sloping demand curve Q (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

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 (units) 1 2 3 4 5 6 7 P = AR (£) 8 TR 14 18 20 TR (£) Quantity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Measuring the maximum profit using average curves MC 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

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

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

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

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

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