4.6

• total revenue definition

  the total money received by a firm from selling its total output
• average revenue definition

  revenue per unit sold - total revenue divided by output
• marginal revenue definition

  Addition to total revenue resulting from the sale of one more unit of the product - extra revenue from selling one more unit
• average revenue equaton

  total revenue / output
• marginal revenue equation

  change in total revenue / change in total output
• what s the relationship between TR, AR and MR under perfect competition ?

  • AR = MR = price
  • revenue curve are horizontal lines
  • firms are price takers
• marginal and average curves plotted from the same data always display the following relationship:

  • when marginal > average, the average rises
  • when marginal < average, the average falls
  • when marginal = average, average is constant
• what happens to MR under imperfect competition (e.g monopoly) ?

  • firms are price makers
  • to sell more units, they must lower price, so MR falls faster than AR
  • MR curve lies below the AR curve
• what does the total revenue (TR) curve look like under imperfect competition?

  • rises at first (MR >0)
  • peaks where MR = 0
  • falls when MR < 0
  • firms maximise TR when MR = 0
• What shape is the AR and MR curve under imperfect competition?

  • AR is a downward-sloping demand curve
  • MR is also downward sloping but twice as steep
  • Shows firms must lower price to sell more, reducing revenue from extra sales
• why does MR fall faster than AR in imperfect competition?

  Because lowering the price to sell an extra unit means:

  • that units earns less
  • All previous units also earn less now
• when is revenue maximised ?

  • when MR = 0
  • beyond this point, selling more means total revenue falls
• how is elasticity of demand related to revenue?

  • if PED > 1 - MR is positive - TR is rising
  • if PED < 1 - MR is negative - TR is falling
  • if PED = 1 - MR = 0 - TR is maximised
• what’s the importance of knowing MR, AR and TR?

  • helps firms decide how much to produce
  • used to find profit-maximising output (where MR=MC)
  • supports pricing strategy based on demand elasticity
• quantity-setter definition

  when a firm faces a downward-sloping demand curve for its product, it possesses the parent power to set the quantity of the good it wishes to sell
• the demand curve facing the firm is also its average revenue curve
• the nature of a firm’s revenue curves depends of the competitiveness of the market structure in which the firm sells its output
• if a monopolist is a price maker, what does the demand curve dictate?

  the maximum output that can be sold at this price
• if a monopolist is a quantity-taker, what does the demand curve dictate?

  the maximum price at which as chosen quantity of a good can be sold