5.3.1

Revenue

Test yourself

Total, Average and Marginal Revenue

The money firms get from selling products is called revenue. The different ways to measure revenue can be used to highlight different aspects of business performance.

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Total revenue

  • Total revenue is the income brought into the firm from selling its products.
    • Total revenue = price × quantity.
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Average revenue

  • Average revenue = total revenue (price × quantity) ÷ quantity.
  • So, average revenue = price.
  • So, if price is equal to average revenue, you could simply rewrite the average revenue curve as the demand curve.
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Marginal revenue

  • This is the additional revenue gained from selling the last output unit.
  • If marginal revenue is positive, total revenue could be increased from expanding output.
  • So, total revenue is maximised when marginal revenue is equal to zero.
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Marginal and average revenue

  • The midpoint of the average revenue curve is where total revenue is maximised.
  • The marginal revenue curve has twice the steepness of the average revenue curve.

Price Takers vs Price Makers

Firms that are price takers cannot control the equilibrium selling price. They have to take the price that is 'decided' by the market. There are price takers and price makers.

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Price takers

  • If selling price cannot be controlled (and so the firm is a price taker), there is perfectly elastic demand.
    • Increasing the price causes the quantity to fall to zero.
  • Here, marginal revenue is equal to average revenue.
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Price makers

  • Price makers have partial control over the price at which their goods are sold.
  • Firms can maximise total revenue by operating at the point where the price elasticity of demand is equal to -1.

Total Revenue and Price Elasticity of Demand

You should be able to understand the relationship between price elasticity of demand and a firm's total revenue.

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Total revenue

  • Total revenue = price per unit × quantity.
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Straight-line demand curve

  • This is how price elasticity of demand (PED) changes along the demand curve:
    • At zero demand or high price - minus infinity.
    • At midpoint - elasticity is minus one.
    • At zero price or high quantity - elasticity is zero.
  • PED of +/- one = maximised total revenue.
    • The closer a product's price is to the midpoint, the higher the revenue.
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Price elastic in demand

  • If a product is price elastic in demand:
    • Decreasing price = increases total revenue.
    • Increasing price = decreases total revenue.
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Price inelastic in demand

  • If a product is price inelastic in demand:
    • Decreasing price = decreases total revenue.
    • Increasing price = increases total revenue.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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