marginal, average and total revenue

• what is total revenue?

  • Total revenue is the total value of all sales a firm
  • total revenue = price (P) x quantity (Q)
• what is average revenue?

  • overall revenue per unit

  average revenue = total revenue (TR)/ quantity (Q)

  average revenue = price x quantity / quantity = price
• what is marginal revenue?

  • Marginal revenue is the extra revenue received from the sale of an additional unit of output

  marginal revenue = change in total revenue/change in quantity
• what happens when marginal revenue is positive?

  total revenue increases as quantity increases
• what happens when marginal revenue =0?

  total revenue does not change
• what happens when marginal revenue is negative?

  total revenue decreases as quantity increases
• what is the relationship of between AR, MR & TR in a perfectly competitive market?

  • the firm is a price taker at P1 (£8)
  • Every unit of output is sold at the same price
  • A higher price would decrease sales to zero
  • A lower price would result in all sellers lowering their price
  • TR increases at a constant rate
  • MR = AR = Demand

  
• describe the relationship between AR, MR & TR for imperfect competition

  •  The firm is a price maker 
  • In order to sell an additional unit of output, the price (AR) must be lowered
  • Both AR and MR fall with additional units of sale
  • When the AR falls, the MR falls by twice as much
  • The gradient of the MR curve is twice as steep as the AR curve
  • TR is maximised when MR = 0
  • AR is the demand (D) curve
  • From the point where MR = 0, the total revenue begins to fall

  
• similarities between AR and MR curve?

  starts at the same point on the price axis.

  MR stops at the same quantity as AR
• differences between AR and MR curve?

  MR curve crosses the quantity axis at half the quantity of the AR curve(twice as steeper)
• what happens to marginal revenue as price decreases?

  marginal revenue decreases from positive to negative
• when price decreases, quantity increases and total revenue has increased, what is the PED?

  elastic
• when price decreases, quantity increases, total revenue decreases, what is the PED?

  inelastic
• what is the PED when MR = 0

  unitary elastic
• the top half of the AR/D curve has what PED?

  elastic - when price is high a % change in price will have a big impact, so consumers will be very responsive and demand will be elastic
• the bottom half of the AR/D curve has what PED?

  inelastic - when price is low, a % change in price will have a small impact so consumers will be unresponsive and demand will be inelastic
• as price goes down the D/AR curve what happens to PED

  goes from elastic, to unitary to inelastic
• what happens to total revenue when price increases and PED is elastic?

  QD will fall by a larger %, so total revenue decreases
• what happens to total revenue when price decreases and PED is elastic?

  total revenue increases as QD increases by a larger %.
• what happens to total revenue when price increases and PED is inelastic?

  total revenue only falls by a bit as QD falls by a smaller %
• what happens to total revenue when price decreases and PED is inelastic?

  total revenue only increases by a bit as QD increases by a smaller %
• what is PED when MR is positive

  elastic
• what is PED when MR is negative

  inelastic
• what is revenue maximisation

  MR=0