Revenue
Syllabus
Candidates should be able to:
 Define total revenue, average revenue and marginal
revenue
 Perform simple calculations using total, average and
marginal revenue
 Draw and interpret revenue curves
 Analyse the relationships between total revenue,
price elasticity of demand and marginal revenue
(calculation required)
Definitions – revenue and total revenue
What is revenue?
What are the other names for revenue?
Revenue depends on the p______ and q_________
What is the formula for total revenue (TR)?
Definitions – average and marginal revenue
What is average revenue (AR)?
If all output is sold at the same price, then what must
average revenue equal?
What is marginal revenue (MR)?
Example of marginal revenue
If total revenue was £70 million when 7 machines were
sold but £76 million when 8 machines were sold then
what is the marginal revenue from the last machine
sold?
Assume all output is sold at the same price, what is the
AR when 7 machines were sold? What is the AR for 8
machines? Comment on your answers.
Revenue explanation when prices are fixed
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The TR curve is ________ sloping as sales increase
AR and MR curves are _______ when sales
increase.
Because the price of the good remains the same, the
AR and MR curves are ____________
The line for AR and MR is horizontal, showing that
whatever the level of output, AR and MR remain the
same at £__
The AR curve is the demand curve, because it shows
the relationship between average price and quantity
sold. So, at any quantity sold, MR = AR = D
Revenue explanation when a firm has to lower prices to increase sales
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AR, or average price, is _______ as sales get larger.
When sales reach __ units, TR begins to fall. The loss
in revenue from having to accept a _____ price more
than outweighs the increase in revenue from extra
sales. So, MR becomes ________. Each extra unit
sold brings in negative extra revenue.
The TR curve at first ______ and then _______. The
AR and MR curves are _________ sloping. The MR
curve slopes _______ as steeply as the AR curve.
The AR curve is also the demand curve because it
shows the relationship between average price and
quantity sold. So AR = D
PED explanation when prices are fixed
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When the price received by a firm for a good is
constant, the AR, MR and demand curves for the
good are __________.
This means that PED for the good is perfectly
________. Whatever the % change in quantity
demanded for the good, there is _______ change in
price of the good.
Sketch a diagram showing AR, MR and TR when
prices are fixed
Price strategy when prices are fixed
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The firm in the perfectly competitive market is a
price taker (see 3.4.2)
It does not have to _________ its price to sell more.
It can sell all of its output at £5
It has a perfectly ________ demand curve
It represents a very ______ firm in a large industry.
They could increase output without affecting the
total industry supply (so no effect on _____
(This only really happens in theory but it is a useful
model)
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PED explanation when a firm has to lower prices to increase sales
When the price of a good falls as sales increase, there
is likely to be a ________ in PED along the AR curve.
Up to _ units, demand is price elastic because falls in
price are resulting in ______ in TR. Above this, demand
is price ________. Falls in price result in falls in TR.
For MR, demand is price elastic when MR is ________
(rising TR). If MR is negative, demand is price _______
The AR curve is also the demand curve. The top half of
the curve shows demand as price elastic, the bottom
half of the curve shows inelastic PED.
PED = 1 (unitary) when total revenue is maximised.
This is when MR = 0
Summary of formula again (!) and link between AR and MR
Write down the formula for total revenue, average
revenue, marginal revenue and PeD
What is the link between AR and MR? Which is
steepest? By how much?