Revenue

• Total revenue tells us how much money a firm receives in total from sales. The formula is Total Revenue = Price x Quantity (TR = P x Q)
• Average revenue tells us what a firm receives on average from each sale. The formula is Average Revenue = Total Revenue / Quantity (AR = TR/Q). Average Revenue also equals Price so AR = P. Average Revenue also equals Demand so AR = D
• The curve must start from the start of the price axis

  
• The relationship between average revenue, price and the demand curve can be seen below

  
• You can think of TR as the area of the rectangle or square between price and quantity

  
• Marginal revenue is the additional revenue a firm makes from selling one extra unit
• Even though marginal revenue will decrease with quantity, if it's still positive then total revenue is increasing because selling an additional unit yields extra revenue
• Once marginal revenue is zero, the total revenue is maximised and yields no extra income therefore any point after this will decrease total revenue
• Another thing to consider is that the quantity won't always go up by one and so if it went up by 2 for example, you would divide the marginal revenue by 2 to get the actual extra income, here is an example of a table with the quantity number jump:

  
• Marginal revenue = Change in total revenue / Change in quantity
• The marginal revenue curve and average revenue curve begin at the same point on the vertical axis, the marginal revenue curve is twice as steep as the average revenue curve so it should pass through the middle point of the average revenue curve. Lastly, the marginal revenue curve continues to the same quantity therefore it goes into the negative and is double the size of the AR curve but you don't always have to draw the negative section

  
• • When MR is positive, TR is increasing
  • When MR is zero, TR is constant
  • When MR is negative, TR is decreasing
  • When MR is zero, TR is also maximised
• Fill this in when possible with the graph showing what quantity and price a company should sell their product at.
• Price elasticity = % Change in quantity demanded / % Change in price
• • If PED is between 0 and -1, the product is price inelastic
  • If PED is between is -1, the product is unitary price elastic
  • If PED is between -1 and infinity, the product is price elastic
• Factors affecting Price elasticity of demand:

  • Availability of substitutes
  • Proportion of income spent
  • Time
  • Luxury or necessity
  • Loyalty
  • Addiction
• On a supply and demand graph, demand is price elastic at high prices while demand is price inelastic at low prices. This is because consumers are more responsive to changes in price at high prices while consumers are less responsive to changes in price at low prices due to the proportion of income spent.