Revenue and

1
Revenue and Profit
2
Revenue

• Defining total, average and marginal revenue
• TR P Q
• AR TR / Q
• MR ?TR / ?Q
• Revenue curves when firms are price takers
  (horizontal demand curve)
• average revenue (AR)
• marginal revenue (MR)

3
Deriving a firms AR and MR price-taking firm
Price ()
S
AR, MR ()
D
O
O
Q (millions)
Q (hundreds)
(a) The market
(b) The firm
4
Deriving a firms AR and MR price-taking firm
Price ()
S
AR, MR ()
D AR MR
Pe
D
O
O
Q (millions)
Q (hundreds)
(a) The market
(b) The firm
5
Revenue

• Defining total, average and marginal revenue
• TR P Q
• AR TR / Q
• MR ?TR / ?Q
• Revenue curves when firms are price takers
  (horizontal demand curve)
• average revenue (AR)
• marginal revenue (MR)
• total revenue (TR)

6
Total revenue for a price-taking firm
Quantity (units)
Price AR MR ()
0 200 400 600 800 1000 1200
5 5 5 5 5 5 5
TR ()
Quantity
7
Total revenue for a price-taking firm
Quantity (units)
Price AR MR ()
TR ()
0 200 400 600 800 1000 1200
5 5 5 5 5 5 5
0 1000 2000 3000 4000 5000 6000
TR ()
Quantity
8
Total revenue for a price-taking firm
TR
Quantity (units)
Price AR MR ()
TR ()
0 200 400 600 800 1000 1200
5 5 5 5 5 5 5
0 1000 2000 3000 4000 5000 6000
TR ()
Quantity
9
Total revenue for a price-taking firm
TR
TR ()
Quantity
10
Revenue

• Revenue curves when price varies with output
  (downward-sloping demand curve)
• average revenue (AR)
• marginal revenue (MR)

11
AR and MR curves for a firm facing a
downward-sloping demand curve
Q (units)
P AR ()
8 7 6 5 4 3 2
1 2 3 4 5 6 7
AR, MR ()
AR
Quantity
12
AR and MR curves for a firm facing a
downward-sloping demand curve
Q (units)
P AR ()
TR ()
MR ()
8 7 6 5 4 3 2
8 14 18 20 20 18 14
1 2 3 4 5 6 7
6 4 2 0 -2 -4
AR, MR ()
AR
Quantity
MR
13
Revenue

• Revenue curves when price varies with output
  (downward-sloping demand curve)
• average revenue (AR)
• marginal revenue (MR)
• total revenue (TR)

14
TR curve for a firm facing a downward-sloping D
curve
TR ()
Quantity
15
TR curve for a firm facing a downward-sloping D
curve
TR
Quantity (units)
P AR ()
TR ()
TR ()
1 2 3 4 5 6 7
8 7 6 5 4 3 2
8 14 18 20 20 18 14
Quantity
16
Revenue

• Revenue curves when price varies with output
  (downward-sloping demand curve)
• average revenue (AR)
• marginal revenue (MR)
• total revenue (TR)
• revenue curves and price elasticity of demand

17
AR and MR curves for a firm facing a
downward-sloping demand curve
AR, MR ()
AR
Quantity
MR
18
TR curve for a firm facing a downward-sloping D
curve
Elastic
Inelastic
TR
TR ()
Quantity
19
Revenue

• Revenue curves when price varies with output
  (downward-sloping demand curve)
• average revenue (AR)
• marginal revenue (MR)
• total revenue (TR)
• revenue curves and price elasticity of demand
• Shifts in revenue curves

20
Profit Maximisation

• Using total curves
• maximising the difference between TR and TC

21
Finding maximum profit using total curves
TR, TC, TP ()
Quantity
22
Finding maximum profit using total curves
TR
TR, TC, TP ()
Quantity
23
Finding maximum profit using total curves
TC
TR
TR, TC, TP ()
Quantity
24
Profit Maximisation

• Using total curves
• maximising the difference between TR and TC
• the total profit curve

25
Finding maximum profit using total curves
TC
TR
TR, TC, TP ()
Quantity
TP
26
Finding maximum profit using total curves
TC
b
TR
a
TR, TC, TP ()
c
d
Quantity
TP
27
Finding maximum profit using total curves
TC
TR
TR, TC, TP ()
Quantity
TP
28
Profit Maximisation

• Using total curves
• maximising the difference between TR and TC
• the total profit curve
• Using marginal and average curves

29
Profit Maximisation

• Using total curves
• maximising the difference between TR and TC
• the total profit curve
• Using marginal and average curves
• stage 1 profit maximised where MR MC

30
Finding the profit-maximising output using
marginal curves
Costs and revenue ()
Quantity
31
Finding the profit-maximising output using
marginal curves
MC
Costs and revenue ()
Quantity
32
Finding the profit-maximising output using
marginal curves
MC
Costs and revenue ()
Quantity
MR
33
Profit Maximisation

• Using total curves
• maximising the difference between TR and TC
• the total profit curve
• Using marginal and average curves
• stage 1 profit maximised where MR MC
• stage 2using AR and AC curves to measure
  maximum profit

34
Measuring the maximum profit using average curves
MC
Costs and revenue ()
Quantity
MR
35
Measuring the maximum profit using average curves
MC
Costs and revenue ()
AR
Quantity
MR
36
Measuring the maximum profit using average curves
MC
Total profit 1.50 x 3 4.50
AC
Costs and revenue ()
T O T A L P R O F I T
AR
Quantity
MR
37
Profit Maximisation

• Some qualifications
• long-run profit maximisation
• the meaning of 'profit'
• What if a loss is made?
• loss minimising still produce where MR MC

38
Loss-minimising output
Costs and revenue ()
O
Quantity
39
Profit Maximisation

• Some qualifications
• long-run profit maximisation
• the meaning of 'profit'
• What if a loss is made?
• loss minimising still produce where MR MC
• short-run shut-down pointP AVC

40
The short-run shut-down point
Costs and revenue ()
O
Quantity
41
Profit Maximisation

• Some qualifications
• long-run profit maximisation
• the meaning of 'profit'
• What if a loss is made?
• loss minimising still produce where MR MC
• short-run shut-down pointP AVC
• long-run shut-down pointP LRAC