Download Revenue - Ecothunk

Revenue Price (P) is the money cost to the consumer of a good or service sold by the producer. Quantity (Q) is the quantity of goods or services produced by the producer and brought by the consumer. Revenue (R) is the income earned by firms. It is the money that comes into the firm from selling the goods it produces or the services it provides. Total Revenue = Q x P Average Revenue (AR) is the average receipt per unit sold. AR=TR/Q Marginal Revenue (MR) is the price of selling an extra unit of output. MR = Change in TR/Change in Q Price Elasticity of Demand (PED) measures the responsiveness of demand to a change in its price. PED=%change in Q/ %change in P %change= new price-­‐old price/old price X 100 Veblen goods are extreme examples of luxuries, for example, expensive paintings. Giffen goods are inferior goods, which are related to income. An example is Tesco Value goods. Total Revenue Curve: (1) TR rises initially because as price falls, quantity rises more than proportionately. TR is maximised at the top of the curve because as price falls further, output rises less than proportionately. Average Revenue Curve: (2) AR slopes downwards because prices must fall to influence an increase in quantity demanded. Marginal Revenue Curve: (3) Perfectly Elastic Average Revenue and Marginal Revenue Graph (4) A perfectly elastic demand curve results in a horizontal AR and MR curve. A constant price is charged so P = AR = MR. An infinite amount of output is demanded. Revenue and Elasticity (5) In the top half of the demand (or AR curve) curve, small proportionate changes in price lead to large proportionate changes in quantity demanded, so PED is greater than 1 (elastic). In the bottom half of the demand curve, large proportionate changes in price lead to small proportionate changes in quantity demanded, so PED is less than 1 (inelastic). At the mid-­‐point of the demand curve, changes in price lead to equal changes in quantity demanded, so PED is exactly one (unit elastic). Key points: Average Revenue:-­‐ •
•
The Average Revenue curve is the same as the demand curve. The curve slopes down showing that more units will be sold as price decreases. Marginal Revenue:-­‐ •
•
•
•
•
The MR curve shows how much revenue increases as price falls and more units are sold. The MR curve intersects the Y axis at the same point as the AR curve. It slopes down, showing that each unit of output sold adds less to revenue than the unit before. It has twice the slope of the AR curve. It intersects the Y axis directly below the mid-­‐point of the AR curve. Total Revenue:-­‐ •
•
•
The TR curve is a bell shape; it follows the same trajectory as a ball thrown in the air. When MR is positive, TR is rising, when MR is negative, TR is peaking. The top of the TF curve is directly below the mid-­‐point of the AR curve which is the same point the MR curve crosses the X axis. Price Elasticity of Demand:-­‐ •
•
•
•
PED varies along the demand or AR curve. PED is more than one (elastic) in the top half of the demand curve. PED is less than one (inelastic) in the bottom half of the demand curve. PED is exactly one (unit elasticity) at the mid-­‐point of the demand curve.