Revenue

Revenue
Total revenue
Total revenue (TR), is the total flow of income to a firm from selling a given quantity of output at
a given price. Total revenue can be calculated by,
Price X Quantity
Average revenue
Average revenue (AR), is revenue per unit, and is found by dividing TR by the quantity sold, (Q).
AR is equivalent to the price of the product.
Total Revenue
Quantity
Marginal revenue
Marginal revenue (MR) is the revenue generated from selling one extra unit of a good or
service. It can be found by finding the change in TR following an increase in output of one unit.
MR can be both positive and negative.
Change in Total Revenue 1000 1100 100

Change in Quantity 50 55 5 20
Shape of the Revenue curves the firm will use the same for each unit . ( constant price
)
Revenue curves vary depending on whether price is constant at all levels of output (as in the
case of a firm which is a price-taker), or falls as output increases (as in the case of a firm who is
a price-setter).
Shape of the revenue curve when the price of the firm is constant .
● The total revenue of the firm increases at a constant rate when the price of a firm is
constant.
● When the price of a firm is constant, marginal revenue and average revenue is equal to
the price of the product. Therefore the AR (Demand curve )and MR curves are perfectly
elastic .
● When a firm faces a perfectly elastic demand curve, then average revenue = marginal
revenue (each unit sold add the same amount to total revenue.)
Shape of the revenue curves when the firm is a price maker (Charging different prices at
different quantities).
Total revenue
Initially, as output (Unit sold ) increases total revenue (TR) also increases, but at a decreasing
rate. It eventually reaches a maximum and then decreases with further output.
Average revenue
However, as output increases the average revenue (AR) curve slopes downwards. The AR curve
is also the firm’s demand curve.
Marginal revenue
The marginal revenue (MR) curve also slopes downwards, but at twice the rate of AR. This
means that when MR is 0, TR will be at its maximum. Increases in output beyond the point
where MR = 0 will lead to a negative MR.
In the table above, as price per unit falls, demand expands and total revenue rises .because
average revenue falls as more units are sold, this causes marginal revenue to decline
Eventually marginal revenue becomes negative, i.e. a further fall in price (e.g. from £220 to
£190) causes total revenue to fall.
Revenue max point =
MR= 0)
● Both AR and MR fall as output increases.

● AR and MR start at the same point on the Y-axis, at the same level of revenue.
● MR curve will fall at twice the rate of the AR curve.
● Using the first graph as well, when MR is positive TR increases and when MR = 0, TR is at
its maximum. If the output expands beyond that , no more added revenue can be
achieved from selling an extra unit of output. If prices were cut marginal revenue
becomes negative and total revenue would fall.
The relationship between elasticity of demand and a firm's total revenue
● If price elasticity of demand >1 (i.e. demand is ielastic), if prices are cut then demand
rises by a grater proportion. Cutting price when demand is relatively elastic means total
revenue increases, or MR>0
● If price elasticity of demand < 1 (i.e. demand is inelastic), if prices are cut then demand
rises by a smaller proportion. Cutting price when demand is relatively inelastic means
total revenue falls, or MR<0
Unit
Why does a firm want to know PED?

There are several reasons why firms gather information about the PED of its products. A firm will know much more
about its internal operations and product costs than it will about its external environment. Therefore, gathering
data on how consumers respond to changes in price can help reduce risk and uncertainly. More specifically,
knowledge of PED can help the firm forecast its sales and set its price.
Sales forecasting
The firm can forecast the impact of a change in price on its sales volume, and sales revenue (total revenue, TR). For
example, if PED for a product is (-) 2, a 10% reduction in price (say, from £10 to £9) will lead to a 20% increase in
sales (say from 1000 to 1200). In this case, revenue will rise from £10,000 to £10,800.
Pricing policy
Knowing PED helps the firm decide whether to raise or lower price, or whether to price discriminate. Price
discrimination is a policy of charging consumers different prices for the same product. If demand is elastic, revenue
is gained by reducing price, but if demand is inelastic, revenue is gained by raising price.
Unit 1 ==== elasticity and revenue
Strategy is dropping prices to increase sales
If the product has an elastic demand = if he drops the price = revenue will increase
If the product has an inelastic demand – dropping the price = revenue will fall

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Revenue

Change in Total Revenue 1000 1100 100

● Both AR and MR fall as output increases.

The relationship between elasticity of demand and a firm's total revenue

Why does a firm want to know PED?

Strategy is dropping prices to increase sales

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