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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.

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Revenue and Profit

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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

Pe

Price (£)

S

AR, MR (£)

D

O

O

Q (millions)

Q (hundreds)

(a) The market

(b) The firm


Deriving a firm’s 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


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)


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


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


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


Total revenue for a price-taking firm

TR

TR (£)

Quantity


Revenue

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

    • average revenue (AR)

    • marginal revenue (MR)


AR and MR curves for a firm facing a downward-slopingdemand curve

Q

(units)

P =AR

(£)

8

7

6

5

4

3

2

1

2

3

4

5

6

7

AR, MR (£)

AR

Quantity


AR and MR curves for a firm facing a downward-slopingdemand curve

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)


TR curve for a firm facing a downward-sloping D curve

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 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


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


AR and MR curves for a firm facing a downward-slopingdemand curve

Elastic

Elasticity = -1

Inelastic

AR, MR (£)

AR

Quantity

MR


TR curve for a firm facing a downward-sloping D curve

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


Finding maximum profit using total curves

TR, TC, TP(£)

Quantity


Finding maximum profit using total curves

TR

TR, TC, TP(£)

Quantity


Finding maximum profit using total curves

TC

TR

TR, TC, TP(£)

Quantity


Profit Maximisation

  • Using total curves

    • maximising the difference between TR and TC

    • the total profit curve


Finding maximum profit using total curves

TC

TR

TR, TC, TP(£)

Quantity

TP


Finding maximum profit using total curves

TC

b

TR

a

TR, TC, TP(£)

c

d

Quantity

TP


Finding maximum profit using total curves

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


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