1. AS: 3.1.3 Production, costs and revenue
1.3.5 Average revenue, total revenue and profit
Using your knowledge of total and average costs write a definition for total and average revenues.
AS: Production, costs and revenue
Y1: Production, costs and revenue

2. 1.3.5 Average revenue, total revenue and profit
The difference between average and total revenue
Why the average revenue curve is the firm’s demand curve
Profit is the difference between total revenue and total costs
You should be able to calculate average, total revenue and profit from given data

3. Total and average revenue
Total Revenue (TR) is money received by a firm from the sale of goods or services:
TR = Q x P
Average Revenue (AR) is total revenue divided by output:
AR = TR/Q

4. Why is the average revenue curve the demand curve?
Example
P £10, Q = 20
TR = £10 x 20 = £200
AR = £10 x 20/20 or £200/20 = £10
Therefore: P = £10 is the same as AR = £10
This is why AR = P
Step 1: Average revenue = total revenue/quantity
Step 2: Total revenue = price x quantity
Step 3: Average revenue = price x quantity/quantity
Step 4: Quantity cancels out and we are left with:
Average revenue = price
Step 4: The demand curve shows the quantity demanded for a good, at any given price, over a period of time
Therefore the average revenue curve is the same as the demand curve
In imperfectly competitive markets the demand curve shows that a reduction in price leads to an increase in demand.
In other words, to sell more of a good or service, the firm will have to lower price.

5. Normal Profit
Profit is the difference between total revenue and total costs
Profit = TR - TC
Normal profit is that level of profit required for a firm to maintain operations
This takes into account the opportunity cost of the firm’s operations
It is the level of profit that is just sufficient for the firm to remain in the industry in the long run
This suggests that it is more attractive to remain in this market than move into others
Normal profit is seen as a cost of production

6. Supernormal profit
Supernormal profit is that level of profit over and above normal profit
This occurs where AR>AC
Supernormal profit is an important element of imperfect markets and occurs because firms have some form of monopoly power
It will attract the entry of new firms into the market looking to share in these additional profits

7. How the objectives of a firm impact on profit
The objectives of a firm will have a significant bearing on its profit:
Profit maximising firms will aim to make supernormal profits in imperfectly competitive markets
Sales maximisation will mean that the firm might still make supernormal profit but not at the maximum level
Again, a firm that profit satisfices might still make supernormal profit but not at the maximum level
What might the financial objectives be for Airbus?
Airbus signs deal for second plant in China

8. Calculating average revenue, total revenue and profit from given dataQ P 10 1 9 2 8 3 7 4 6 5 Q AR TR AC TC
Profit
The demand for a good at various prices is shown in Table 1.
A variety of costs and revenues can be found in Table 2.
Fixed costs are £8 and variable costs are £2 per unit.
Calculate AR, TR, AC, TC and profit from the given data.
Table 1
Table 2

9. Calculating average revenue, total revenue and profit from given dataQ AR TR AC TC
Profit - 8 1 9 10 -1 2 16 6 12 4 3 7 21
4.7 14 24 5 30
3.6 18
3.3 20
3.1 22 -8
2.9 26
-17
2.8 28
-28
Use the data to draw:
A demand curve
An average cost curve
The demand for a good at various prices is shown in Table 1.
A variety of costs and revenues can be found in Table 2.
Fixed costs are £8 and variable costs are £2 per unit.
Calculate AR, TR and profit from the given data
1. Q = 0 to 10
2. TR = Q x P e.g. 2 x £8; 3 x £7 etc.
3. AR = TR/Q
4. TC = FC + VC e.g. At a quantity of 4: FC = £8, VC = 4 x £2, TC = £16
5. AC = TC/Q