Download Revenue Maximisation and Elasticity Revenue

Revenue Maximisation and Elasticity When Marginal Revenue is positive, it means the firm is increasing its total revenue.
If MR is negative then total profits are decreasing. Therefore, revenue is maximised
when MR = 0
Revenue and Elasticity •
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On a straight demand curve, the elasticity of demand varies. Initially, PED is elastic. This is because the % change in QD is greater than % change in price. As price falls, revenue increases (MR>0) because demand is price elastic However, later the demand curve becomes inelastic. The % change in Q.D is less than % change in price. Here a fall in price leads to a decline in revenue because demand is price inelastic. Where MR= 0. PED = 1 (Unitary elasticity). At this point changing price doesn’t change total revenue, the % change in price is same as % change in Q.D Why Companies Grow Companies wish to increase size and sales for various reasons.
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Increase profit. Higher profit enables higher wages and more money for investment. Economies of Scale. In industries with high fixed costs, increased market sales leads to lower average costs enabling a firm to be more competitive. Market Dominance. With higher sales and market share, firms can have more influence over the long term; it could help them increase price and profits in the long term. Risk Bearing economies. A bigger firm has more resources to survive an economic downturn. Difficulties of Firms Growing •
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Diseconomies of scale. Increasing size may lead to higher average costs due to difficulties of managing large firm. This is more important if fixed costs are high in the industry. Lost Perks. If a firm grows in size it may lose benefits of remaining a small firm (e.g. lower corporation tax, VAT and grants from government) Difficult for niche market. Some firms may specialise in small niche markets. Becoming a large firm reduces the attractiveness of the firm. Take over Target. Listing on stock markets can make firm vulnerable to takeovers / short termism. Profit satisficing. In bigger firms owners may struggle to retain control. Managers in charge may pursue other objectives. Legal Barriers. A key patent may prevent other firms developing a strong brand name. Alternatively some industries may be a legal monopoly like Royal Mail used to be. Access to Key Locations. A new airline may struggle to grow because it has difficulty getting landing slots at Heathrow airport. How Firms Grow Internal expansion involves the firm increasing its sales and market share. This
involves:
• Investing in new productive capacity / technology • Marketing campaigns which increase demand for products • Creating new product lines related to existing products External Expansion – involving a merger or takeover with another firm.
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Horizontal merger – when two firms at same stage of production merge. E.g. Guinness brewers and Tetley Brewers. Vertical Merger – when two firms at different stage of production merge. E.g. Guinness brewer buys a chain of pubs or a farmer who grows hops. International Trade •
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Absolute Advantage: This occurs when one country can produce a good with fewer resources than another. Comparative Advantage: A country has a comparative advantage if it can produce a good at a lower opportunity cost: i.e. it has to forego less of other goods in order to produce it. The Law of Comparative advantage. This states that trade can benefit all countries if they specialise in the goods in which they have a comparative advantage. Terms Of Trade: This measures the
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price index of exports
price index of imports.
It is expressed as a percentage so in the base year it will be 100 .
An improvement in the terms of trade (an increase in ratio) means that the
price of exports increases relative to imports.
Benefits of Free Trade. 1.
Reducing Tariff barriers leads to trade creation
Trade creation occurs when consumption switches from
high cost producers to low cost producers.
P
S UK
S World
+ Tariff
P1
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S World
P2
D
Q
Q1
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Q2
Q3
Q4
The removal of tariffs leads to lower prices for consumers ( P1 – P2)
and an increase in consumer surplus (1+2+3+4)
The government will lose tax revenue of area 3
Domestic firms will sell less and lose producer surplus of area 1
However overall there will be an increase in economic welfare of 2+4