Revenue
Lesson Objectives
• To understand what revenue is
• To understand the concepts of average,
marginal and total revenue
• To be able to calculate AR, MR and TR
• To be able to explain the relationship
between revenue and elasticity
Revenue
The income generated from the sale of
output in product markets
• Total Revenue (TR) = Price per unit x
quantity sold
• Average Revenue (AR) = Price per unit =
total revenue / output
• Marginal Revenue (MR) = the change in
revenue from selling one extra unit of
output
Revenue and Price – taking firms
• A firm which is too small to affect the
market price will face a constant price as it
changes the number of products it sells
• So demand for the firms product is
________________
• Perfectly elastic
• MR = AR and both will be constant because
when the firm sells an extra unit it will
receive the same price
S
AR, MR (£)
Price (£)
Deriving a firm’s AR and MR: price-taking firm
D = AR
= MR
Pe
D
O
Q (millions)
(a) The market
O
Q (hundreds)
(b) The firm
Total revenue for a price-taking firm
Quantity Price = AR TR
(units) = MR (£) (£)
6000
0
200
400
600
800
1000
1200
TR (£)
5000
4000
3000
5
5
5
5
5
5
5
0
1000
2000
3000
4000
5000
6000
2000
1000
0
0
200
400
600
Quantity
800
1000
1200
Total revenue for a price-taking firm
Quantity Price = AR
(units) = MR (£)
6000
0
200
400
600
800
1000
1200
TR (£)
5000
4000
3000
5
5
5
5
5
5
5
TR
TR
(£)
0
1000
2000
3000
4000
5000
6000
2000
1000
0
0
200
400
600
Quantity
800
1000
1200
Firms facing downward- sloping
demand curves
• Most cases- firms have to lower P to sell
more and experience a fall in D if they
raise their P
• AR and MR fall as sales rise
• Initially MR= AR, but falls below it after
one unit (because to sell more the firm has
to lower the price of all units)
• MR can be negative- a fall in P causes D to
rise by a smaller % so TR falls
AR and MR curves for a firm facing a downward-sloping D curve
Q P =AR
(units) (£)
8
1
7
2
6
3
5
4
4
5
3
6
2
7
8
AR, MR (£)
6
4
AR
2
0
1
-2
-4
2
3
4
5
6
7
Quantity
AR and MR curves for a firm facing a downward-sloping D curve
Q P =AR
(units) (£)
8
1
7
2
6
3
5
4
4
5
3
6
2
7
8
AR, MR (£)
6
4
0
1
-4
MR
(£)
6
4
2
0
-2
-4
AR
2
-2
TR
(£)
8
14
18
20
20
18
14
2
3
4
5
6
7
Quantity
AR and MR curves for a firm facing a downward-sloping D curve
Q P =AR
(units) (£)
8
1
7
2
6
3
5
4
4
5
3
6
2
7
8
AR, MR (£)
6
4
MR
(£)
6
4
2
0
-2
-4
AR
2
0
1
2
3
4
5
6
7
-2
-4
TR
(£)
8
14
18
20
20
18
14
MR
Quantity
TR curve for a firm facing a downward-sloping D curve
20
TR (£)
16
Quantity P = AR
(units)
(£)
12
1
2
3
4
5
6
7
8
4
TR
(£)
8
7
6
5
4
3
2
8
14
18
20
20
18
14
5
6
0
0
1
2
3
4
Quantity
7
TR curve for a firm facing a downward-sloping D curve
20
TR (£)
16
Quantity P = AR
(units)
(£)
12
1
2
3
4
5
6
7
8
4
TR
TR
(£)
8
7
6
5
4
3
2
8
14
18
20
20
18
14
5
6
0
0
1
2
3
4
Quantity
7
Revenue
Revenue and
price elasticity of demand
Price
QD
TR
50
0
0
45
2
90
40
4
160
35
6
210
30
8
240
25
10
250
20
12
240
15
14
210
10
16
160
5
18
90
0
20
0
AR
MR
PED
Price
QD
TR
50
0
0
AR
MR
PED
45
45
40
35
30
25
20
15
10
5
0
2
4
6
8
10
12
14
16
18
20
90
160
210
240
250
240
210
160
90
0
45
35
9
25
4
15
2.33
5
1.5
5
1
-15
0.67
-25
0.43
-35
0.25
-45
0.11
40
35
30
25
20
15
10
5
• Plot the AR and MR curves
• Note the AR curve is our D curve as AR
is equal to price
• Label the elasticity (i.e. inelastic unitary
and elastic) along the AR (=D) curve
• Plot the TR curve on the graph
• Relationship between revenue and
elasticity?
• TR is maximised when MR= 0 and PED = 1
Revenue
(£)
Elastic
Unitary
Inelastic
AR
MR
Quantity
Revenue
MR= 0
Unitary
Quantity