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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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Presentation Transcript
revenue
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
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 firm1
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

revenue1
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
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 firm1
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 firm2
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

revenue2
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 sloping demand curve
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 sloping demand curve1
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

revenue3
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
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 curve1
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

revenue4
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 sloping demand curve2
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 curve2
TR curve for a firm facing a downward-sloping D curve

Elasticity = -1

Elastic

Inelastic

TR

TR (£)

Quantity

revenue5
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
Profit Maximisation
  • Using total curves
    • maximising the difference between TR and TC
profit maximisation1
Profit Maximisation
  • Using total curves
    • maximising the difference between TR and TC
    • the total profit curve
finding maximum profit using total curves3
Finding maximum profit using total curves

TC

TR

TR, TC, TP(£)

Quantity

TP

finding maximum profit using total curves4
Finding maximum profit using total curves

TC

b

TR

a

TR, TC, TP(£)

c

d

Quantity

TP

finding maximum profit using total curves5
Finding maximum profit using total curves

d

e

f

TC

TR

TR, TC, TP(£)

Quantity

TP

profit maximisation2
Profit Maximisation
  • Using total curves
    • maximising the difference between TR and TC
    • the total profit curve
  • Using marginal and average curves
profit maximisation3
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 curves2
Finding the profit-maximising output using marginal curves

Profit-maximising

output

e

MC

Costs and revenue (£)

Quantity

MR

profit maximisation4
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
Measuring the maximum profit using average curves

MC

Costs and revenue (£)

Quantity

MR

measuring the maximum profit using average curves1
Measuring the maximum profit using average curves

MC

Costs and revenue (£)

AR

Quantity

MR

measuring the maximum profit using average curves2
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 maximisation5
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
Loss-minimising output

MC

AC

AC

LOSS

AR

AR

Q

MR

Costs and revenue (£)

O

Quantity

profit maximisation6
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
The short-run shut-down point

AC

P =

AVC

AVC

AR

Q

Costs and revenue (£)

O

Quantity

profit maximisation7
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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