revenue and profit

• Revenue


  The money made from sales by a business
• Total revenue


  Price charged multiplied by quantity sold
• Average revenue


  Total revenue divided by quantity
• Marginal revenue


  The extra revenue generated when more output is sold
• Marginal revenue is the change in total revenue divided by the change in quantity
• Perfect competition


  • Many buyers and sellers
  • Selling homogeneous goods and services
  • Firms are price takers
  • No barriers to entry and exit
  • Perfect information of market conditions
• In perfect competition


  Average revenue equals marginal revenue which equals demand
• In perfect competition, the total revenue curve is a linear upward sloping line
• Imperfect competition


  • Few buyers and sellers
  • Selling differentiated goods and services
  • Firms are price makers
  • High barriers to entry and exit
  • Imperfect information of market conditions
• In imperfect competition


  • Average revenue is downward sloping like a demand curve
  • Marginal revenue is also downward sloping but at a much faster rate than average revenue
• In imperfect competition, total revenue is maximized when marginal revenue is equal to zero
• Average revenue equals demand
• Profit

  Total revenue minus total cost
• Economists include both explicit costs (physical, fixed, variable) and implicit costs (opportunity cost) in the profit equation, while accountants only consider explicit costs
• Economic profit

  • Company A: 0
  • Company B: 10,000
  • Company C: -10,000
• Normal profit

  Minimum level of profit required to keep factors of production in their current use
• Super normal (abnormal) profit

  Economic profit greater than normal profit
• Sub normal profit (economic loss)

  Economic profit less than normal profit
• Average revenue (AR) equals average cost (AC)

  Normal profit
• Average revenue (AR) greater than average cost (AC)

  Super normal (abnormal) profit
• Average revenue (AR) less than average cost (AC)

  Sub normal profit (economic loss)