Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR =...

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Revenue and Profit

Transcript of Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR =...

Page 1: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

Revenue and

Profit

Revenue and

Profit

Page 2: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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)

Page 3: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 4: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 5: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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)

Page 6: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

0

1000

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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

Page 7: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

0

1000

2000

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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

Page 8: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 9: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

0

1000

2000

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6000

0 200 400 600 800 1000 1200

TR

TR

)

Quantity

Total revenue for a price-taking firmTotal revenue for a price-taking firm

Page 10: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

RevenueRevenue

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

– average revenue (AR)

– marginal revenue (MR)

Page 11: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-4

-2

0

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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

Page 12: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 13: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

RevenueRevenue

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

– average revenue (AR)

– marginal revenue (MR)

– total revenue (TR)

Page 14: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 15: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 16: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 17: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 18: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

0

4

8

12

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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

Page 19: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 20: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

Profit MaximisationProfit Maximisation

• Using total curves

– maximising the difference between TR and TC

Page 21: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 22: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 23: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 24: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

Profit MaximisationProfit Maximisation

• Using total curves

– maximising the difference between TR and TC

– the total profit curve

Page 25: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 26: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 27: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 28: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

Profit MaximisationProfit Maximisation

• Using total curves

– maximising the difference between TR and TC

– the total profit curve

• Using marginal and average curves

Page 29: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 30: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 31: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 32: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 33: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 34: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 35: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

-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

Page 36: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

6.00

4.50

-4

0

4

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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

Page 37: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 38: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

LOSSLOSS

O

Co

sts

and

rev

enu

e (

£)

Quantity

MC

AC

AR

MR

Q

AC

AR

Loss-minimising outputLoss-minimising output

Page 39: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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

Page 40: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

The short-run shut-down pointThe short-run shut-down point

O

Co

sts

and

rev

enu

e (

£)

Quantity

AR

AVC

ACP =AVC

Q

Page 41: Revenue and Profit Revenue and Profit. Revenue Defining total, average and marginal revenue –TR = P × Q –AR = TR / Q –MR = TR / Q Revenue curves when.

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