Revenue and profit

• Total revenue (TR)


  Revenue received from the sale of a given level of output, calculated by price x quantity sold
• Average revenue (AR)


  The average receipt per unit, calculated by TR / quantity sold
• Marginal revenue (MR)


  The extra revenue earned from the sale of one extra unit, the difference between total revenue at different levels of output
• Calculating total revenue


  Price x quantity sold
• Calculating average revenue


  TR / quantity sold
• When price is constant, TR is shown as a straight line
• Prices are lowered to achieve higher sales
• The AR curve is the firm's demand curve
• In markets where firms are price takers, the AR curve is horizontal
• The point where MR = 0 on the revenue diagram is directly below the midpoint of the AR curve
• This is in the middle of the demand curve and it is the point where PED = 1
• If prices rise or fall around this point, TR would fall
• Accounting profit


  Total monetary revenue minus total costs, higher than economic profit
• Economic profit


  Considers the opportunity cost of production in addition to monetary costs, lower than accounting profit
• Normal profit


  The minimum reward required to keep entrepreneurs supply their enterprise, covers the opportunity cost of investing funds into the firm and not elsewhere, when TR = TC
• Supernormal profit


  Profit above normal profit, exceeds the value of opportunity cost of investing funds into the firm, when TR > TC
• Losses


  When a firm fails to cover their total costs
• Profit maximisation occurs where marginal cost (MC) = marginal revenue (MR)
• Profits increase when MR > MC, profits decrease when MC > MR
• Reasons firms choose to profit maximise

  • Provides greater wages and dividends for entrepreneurs
  • Retained profits are a cheap source of finance, which saves paying high interest rates on loans
  • In the short run, the interests of the owners or shareholders are most important, since they aim to maximise their gain from the company
  • Some firms might profit maximise in the long run since consumers do not like rapid price changes in the short run, so this will provide a stable price and output
• AR = the demand curve, because AR is the price of the good, and the demand curve shows the relationship between price and quantity
• Average revenue = marginal revenue
• If demand is elastic and price increases


  Quantity demanded will fall, the effect on total revenue depends on how elastic the demand is
• The MR curve is twice as steep as the AR curve
• The AR curve is a trend line