Post on 26-Mar-2015
Revenue and
Profit
Revenue and
Profit
RevenueRevenue
• 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)
O O
Pri
ce (
£)
AR
, MR
(£
)
Q (millions) Q (hundreds)
Pe
S
D
(a) The market (b) The firm
Deriving a firm’s AR and MR: price-taking firmDeriving a firm’s AR and MR: price-taking firm
O O
Pri
ce (
£)
AR
, MR
(£
)
Pe
S
D
D = AR= MR
Q (millions) Q (hundreds)
(a) The market (b) The firm
Deriving a firm’s AR and MR: price-taking firmDeriving a firm’s AR and MR: price-taking firm
RevenueRevenue
• 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)
0
1000
2000
3000
4000
5000
6000
0 200 400 600 800 1000 1200
Total revenue for a price-taking firmTotal revenue for a price-taking firmT
R (
£)
Quantity
Quantity(units)
0200400600800
10001200
Price = AR= MR (£)
5555555
0
1000
2000
3000
4000
5000
6000
0 200 400 600 800 1000 1200
TR
(£
)
Quantity
Quantity(units)
0200400600800
10001200
Price = AR= MR (£)
5555555
TR(£)
0100020003000400050006000
Total revenue for a price-taking firmTotal revenue for a price-taking firm
0
1000
2000
3000
4000
5000
6000
0 200 400 600 800 1000 1200
TR
TR
(£
)
Quantity
Quantity(units)
0200400600800
10001200
Price = AR= MR (£)
5555555
TR(£)
0100020003000400050006000
Total revenue for a price-taking firmTotal revenue for a price-taking firm
0
1000
2000
3000
4000
5000
6000
0 200 400 600 800 1000 1200
TR
TR
(£
)
Quantity
Total revenue for a price-taking firmTotal revenue for a price-taking firm
RevenueRevenue
• Revenue curves when price varies with output (downward-sloping demand curve)
– average revenue (AR)
– marginal revenue (MR)
-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
AR and MR curves for a firm facing a downward-sloping demand curve
AR and MR curves for a firm facing a downward-sloping demand curve
Q(units)
1234567
P =AR(£)8765432
ARAR
, MR
(£
)
Quantity
-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
Q(units)
1234567
P =AR(£)8765432
TR(£)
8141820201814
MR(£)
6420
-2-4
MR
AR
, MR
(£
)
Quantity
AR
AR and MR curves for a firm facing a downward-sloping demand curve
AR and MR curves for a firm facing a downward-sloping demand curve
RevenueRevenue
• Revenue curves when price varies with output (downward-sloping demand curve)
– average revenue (AR)
– marginal revenue (MR)
– total revenue (TR)
0
4
8
12
16
20
0 1 2 3 4 5 6 7
TR curve for a firm facing a downward-sloping D curveTR curve for a firm facing a downward-sloping D curve
Quantity
TR
(£
)
Quantity(units)
1234567
P = AR(£)
8765432
TR(£)
8141820201814
0
4
8
12
16
20
0 1 2 3 4 5 6 7
TR
Quantity
TR
(£
)
Quantity(units)
1234567
P = AR(£)
8765432
TR(£)
8141820201814
TR curve for a firm facing a downward-sloping D curveTR curve for a firm facing a downward-sloping D curve
RevenueRevenue
• 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
-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
Elasticity = -1
Elastic
Inelastic
AR
, MR
(£
)
Quantity
MR
AR
AR and MR curves for a firm facing a downward-sloping demand curve
AR and MR curves for a firm facing a downward-sloping demand curve
0
4
8
12
16
20
0 1 2 3 4 5 6 7
TR
Elasticity = -1
Elast
ic
Inelastic
Quantity
TR
(£
)TR curve for a firm facing a downward-sloping D curveTR curve for a firm facing a downward-sloping D curve
RevenueRevenue
• 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 MaximisationProfit Maximisation
• Using total curves
– maximising the difference between TR and TC
-8
-4
0
4
8
12
16
20
24
1 2 3 4 5 6 7
TR
, TC
, T
(£
)
Quantity
Finding maximum profit using total curvesFinding maximum profit using total curves
-8
-4
0
4
8
12
16
20
24
1 2 3 4 5 6 7
TR
, TC
, T
(£
)
TR
Quantity
Finding maximum profit using total curvesFinding maximum profit using total curves
-8
-4
0
4
8
12
16
20
24
1 2 3 4 5 6 7
TR
, TC
, T
(£
)
TR
TC
Quantity
Finding maximum profit using total curvesFinding maximum profit using total curves
Profit MaximisationProfit Maximisation
• Using total curves
– maximising the difference between TR and TC
– the total profit curve
-8
-4
0
4
8
12
16
20
24
1 2 3 4 5 6 7
TR
, TC
, T
(£
)
T
TR
TC
Quantity
Finding maximum profit using total curvesFinding maximum profit using total curves
-8
-4
0
4
8
12
16
20
24
1 2 3 4 5 6 7
TR
, TC
, T
(£
)
T
TR
TC
a
b
c d
Quantity
Finding maximum profit using total curvesFinding maximum profit using total curves
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
1 2 3 4 5 6 7
TR
, TC
, T
(£
)
T
TR
TC
d
e
f
Quantity
Finding maximum profit using total curvesFinding maximum profit using total curves
Profit MaximisationProfit Maximisation
• Using total curves
– maximising the difference between TR and TC
– the total profit curve
• Using marginal and average curves
Profit MaximisationProfit 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
-4
0
4
8
12
16
1 2 3 4 5 6 7Quantity
Co
sts
and
rev
enu
e (
£)
Finding the profit-maximising output using marginal curvesFinding the profit-maximising output using marginal curves
-4
0
4
8
12
16
1 2 3 4 5 6 7Quantity
Co
sts
and
rev
enu
e (
£)
MC
Finding the profit-maximising output using marginal curvesFinding the profit-maximising output using marginal curves
-4
0
4
8
12
16
1 2 3 4 5 6 7Quantity
Co
sts
and
rev
enu
e (
£)
e
MR
MC
Profit-maximisingoutput
Finding the profit-maximising output using marginal curvesFinding the profit-maximising output using marginal curves
Profit MaximisationProfit 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
-4
0
4
8
12
16
1 2 3 4 5 6 7Quantity
Co
sts
and
rev
enu
e (
£)
Measuring the maximum profit using average curvesMeasuring the maximum profit using average curves
MR
MC
-4
0
4
8
12
16
1 2 3 4 5 6 7Quantity
Co
sts
and
rev
enu
e (
£)
MR
MC
AR
Measuring the maximum profit using average curvesMeasuring the maximum profit using average curves
6.00
4.50
-4
0
4
8
12
16
1 2 3 4 5 6 7
T O T A L P R O F I TT O T A L P R O F I T
MR
Quantity
Co
sts
and
rev
enu
e (
£)
MC
AC
AR
b
a
Total profit =£1.50 x 3 = £4.50
Measuring the maximum profit using average curvesMeasuring the maximum profit using average curves
Profit MaximisationProfit Maximisation
• Some qualifications
– long-run profit maximisation
– the meaning of 'profit'
• What if a loss is made?
– loss minimising: still produce where MR = MC
LOSSLOSS
O
Co
sts
and
rev
enu
e (
£)
Quantity
MC
AC
AR
MR
Q
AC
AR
Loss-minimising outputLoss-minimising output
Profit MaximisationProfit 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 pointThe short-run shut-down point
O
Co
sts
and
rev
enu
e (
£)
Quantity
AR
AVC
ACP =AVC
Q
Profit MaximisationProfit 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