Total Revenues and Profits

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Total Revenues and Profits
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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.

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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.

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TR, Price and PED

• Complete the table. Plot two graphs under one
  another, one showing P / Q and TR / Q

Price Quantity TR PED
10 0
8 5
6 10
4 15
2 20
0 25
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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.

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Marginal revenue and PED
P
TR max

• 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)

DAR
output
MR _
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Profit maximising

• If MR gt MC then making and selling an extra good
  or service will increase profits.
• If MR lt MC the firm will make a loss on that
  sale, reducing the profits of the business.
• Firms maximise profits where MR MC.
• 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.

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Profit and Revenue maximisation
MCs MRs
MC
Total revenue maximisation
Profit Max output
MR
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Normal profit

• Normal profit is the return to the entrepreneur
  for risk taking.
• When ACAR normal profit is being earned.
• When ARgtAC 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 ARltAC 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.

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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

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More simply

• Profit is maximised where TR and TC are furthest
  away from each other (assuming TR gt TC).
• When this happens MR MC!

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What is happening at each level of output?
max
Output
MR