Transcript Total Revenues and Profits

Total Revenues and
Profits
Revenues

Total revenue is the total amount of
income earned by a firm through selling
goods and / or services. TR = P X Q

Average revenue is a posh word for the
price (since it is simply TR / Q).

Marginal revenue is the revenue gained
from selling one more unit.
Demand curves and Total Revenue

Are usually thought to be downward
sloping.

Total revenue can be shown by the box
formed by the demand curve and the axes
of a demand and supply diagram.
TR, Price and PED

Complete the table. Plot two graphs under one
another, one showing P / Q and TR / Q
Price
10
8
6
4
2
0
Quantity
0
5
10
15
20
25
TR
PED
Marginal Revenue

If total revenue is increasing MR must be
positive.

If total revenue is decreasing MR must be
negative.

That tells us something about the value of MR
when revenue is maximised – and also helps us
understand how Elasticity varies along a straight
demand curve.
Marginal revenue and PED
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You know:
How PED varies along
the length of a demand
curve.
If demand is price elastic
cutting the price raises
total revenue (MR is
positive)
If demand is price
inelastic cutting the price
will reduce the total
revenue. (MR is
negative)
P
TR max
+
D=AR
MR
_
output
Profit maximising
If MR > MC then making and selling an extra
good or service will increase profits.
 If MR < MC the firm will make a loss on that
sale, reducing the profits of the business.


Firms maximise profits where MR = MC.

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This is the law! DO NOT FORGET THIS!
If a firm is maximsing profits (which we often
assume they are) then they will produce at a
level of output where MR = MC.
Profit and Revenue maximisation
MCs &
MRs
MC
Total revenue
maximisation
Profit Max
output
MR
Normal profit
Normal profit is the return to the entrepreneur
for risk taking.
 When AC=AR normal profit is being earned.
 When AR>AC supernormal or abnormal profit is
being earned. If there is freedom of entry into
an industry more firms will join in the long
run.
 When AR<AC an economic loss is made. Either
the level of profits are below normal or the firm
is not even making any return for the
entrepreneur. The business will close down in
the long run.

Revenue maximisation

Firms will maximise revenue at a
level of output where MR = 0.
At levels of output lower than this MR is
positive an extra units will add to total
revenue.
 At levels of output higher than this MR is
negative and extra units will reduce total
revenue

More simply

Profit is maximised where TR and TC are
furthest away from each other (assuming
TR > TC).
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When this happens MR = MC!
What is happening at each level of output?
TC
max
TR
&
TC
TR
MR
Output