This presentation is the property of its rightful owner.
1 / 41

# Revenue and Profit PowerPoint PPT Presentation

Revenue and Profit. 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 ). Deriving a firm’s AR and MR: price-taking firm. P e.

Revenue and Profit

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Revenue and

Profit

### 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)

Pe

Price (£)

S

AR, MR (£)

D

O

O

Q (millions)

Q (hundreds)

(a) The market

(b) The firm

Price (£)

S

AR, MR (£)

D = AR

= MR

Pe

D

O

O

Q (millions)

Q (hundreds)

(a) The market

(b) The firm

### 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)

Quantity

(units)

Price = AR

= MR (£)

0

200

400

600

800

1000

1200

5

5

5

5

5

5

5

TR (£)

Quantity

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

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

TR

TR (£)

Quantity

### Revenue

• Revenue curves when price varies with output (downward-sloping demand curve)

• average revenue (AR)

• marginal revenue (MR)

Q

(units)

P =AR

(£)

8

7

6

5

4

3

2

1

2

3

4

5

6

7

AR, MR (£)

AR

Quantity

Q

(units)

TR

(£)

MR

(£)

P =AR

(£)

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

### Revenue

• Revenue curves when price varies with output (downward-sloping demand curve)

• average revenue (AR)

• marginal revenue (MR)

• total revenue (TR)

Quantity

(units)

P = AR

(£)

TR

(£)

1

2

3

4

5

6

7

8

7

6

5

4

3

2

8

14

18

20

20

18

14

TR (£)

Quantity

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

### 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

Elastic

Elasticity = -1

Inelastic

AR, MR (£)

AR

Quantity

MR

Elasticity = -1

Elastic

Inelastic

TR

TR (£)

Quantity

### 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

### Profit Maximisation

• Using total curves

• maximising the difference between TR and TC

TR, TC, TP(£)

Quantity

TR

TR, TC, TP(£)

Quantity

TC

TR

TR, TC, TP(£)

Quantity

### Profit Maximisation

• Using total curves

• maximising the difference between TR and TC

• the total profit curve

TC

TR

TR, TC, TP(£)

Quantity

TP

TC

b

TR

a

TR, TC, TP(£)

c

d

Quantity

TP

d

e

f

TC

TR

TR, TC, TP(£)

Quantity

TP

### Profit Maximisation

• Using total curves

• maximising the difference between TR and TC

• the total profit curve

• Using marginal and average curves

### 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

### Finding the profit-maximising output using marginal curves

Costs and revenue (£)

Quantity

### Finding the profit-maximising output using marginal curves

MC

Costs and revenue (£)

Quantity

### Finding the profit-maximising output using marginal curves

Profit-maximising

output

e

MC

Costs and revenue (£)

Quantity

MR

### 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 2:using AR and AC curves to measure maximum profit

### Measuring the maximum profit using average curves

MC

Costs and revenue (£)

Quantity

MR

### Measuring the maximum profit using average curves

MC

Costs and revenue (£)

AR

Quantity

MR

### Measuring the maximum profit using average curves

a

6.00

b

4.50

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

### 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

### Loss-minimising output

MC

AC

AC

LOSS

AR

AR

Q

MR

Costs and revenue (£)

O

Quantity

### 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 point:P = AVC

### The short-run shut-down point

AC

P =

AVC

AVC

AR

Q

Costs and revenue (£)

O

Quantity

### 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 point:P = AVC

• long-run shut-down point:P = LRAC