Revenues and ProfitsA2 Microeconomics - Tutor2u
Revenues
Revenue
Output Sold
Average Revenue = Demand
Revenues
Revenue
Output Sold
Average Revenue = Demand
P1
Q1
Revenues
Revenue
Output Sold
Average Revenue = Demand
P1
Q1
Total Revenue = Price x Quantity (P1 x Q1)
Revenues
Revenue
Output Sold
Average Revenue = Demand
P1
Q1
Total Revenue = Price x Quantity (P1 x Q1)
P2
Q2
Cutting the price from P1 to P2 causes total revenue to rise
Revenues
Revenue
Output Sold
Average Revenue = Demand
P1
Q1
Total Revenue = Price x Quantity (P1 x Q1)
P2
Q2
Cutting the price from P1 to P2 causes total revenue to rise
A
B
C
Area A+ B is smaller than A+C
Revenues
Revenue
Output Sold
Average Revenue = Demand
P1
Q1
P2
Q2
If a fall in price causes total revenue to rise – then
marginal revenue will be positive
A
B
C
Revenues: Average and Marginal Revenue (AR and MR)
Revenue
Output Sold
Average Revenue
Marginal Revenue
Revenues
Revenue
Output Sold
Average Revenue
Marginal Revenue
P1
Q1
Revenues
Revenue
Output Sold
Average Revenue
Marginal Revenue
P1
Q1
When MR = zero, total revenue is
maximised
Analysis of Revenues, Costs and Profits
MCCosts & Revenue
Output
AC
MR
AR
The Profit Maximising Output
MCCosts & Revenue
Output
AC
MR
AR
Q*
The Profit Maximising Price
MCCosts & Revenue
Output
AC
MR
AR
Q*
P*
The Profit Maximising Price
MCCosts & Revenue
Output
AC
MR
AR
Q*
P*
AC
The Profit Maximising Price
MCCosts & Revenue
Output
AC
MR
AR
Q*
P*
ACSNP
Analysis Diagram for a Loss-Making Business
MCCosts & Revenue
Output
AC
MRAR
Loss-Making Business
MC
Output
AC
MRAR
(MR=MC)
C1
Q1
Costs & Revenue
Loss-Making Business
MC
Output
AC
MRAR
(MR=MC)
C1
Q1
P1
Costs & Revenue
Loss-Making Business – Price < AC (subnormal profits)
MCCosts & Revenue
Output
AC
MRAR
(MR=MC)
C1
Q1
P1
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