Revenue And Profit
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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)
S
AR, MR (£)
Price (£)
Deriving a firm’s AR and MR: price-taking firm
Pe
D O
Q (millions)
(a) The market
O
Q (hundreds)
(b) The firm
S
AR, MR (£)
Price (£)
Deriving a firm’s AR and MR: price-taking firm
D = AR = MR
Pe
D O
Q (millions)
(a) The market
O
Q (hundreds)
(b) The firm
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 Quantity Price = AR (units) = MR (£)
6000
0 200 400 600 800 1000 1200
TR (£)
5000 4000 3000
5 5 5 5 5 5 5
2000 1000 0 0
200
400
600
Quantity
800
1000
1200
Total revenue for a price-taking firm Quantity Price = AR (units) = MR (£)
6000
0 200 400 600 800 1000 1200
TR (£)
5000 4000 3000
5 5 5 5 5 5 5
TR (£) 0 1000 2000 3000 4000 5000 6000
2000 1000 0 0
200
400
600
Quantity
800
1000
1200
Total revenue for a price-taking firm Quantity Price = AR (units) = MR (£)
6000
0 200 400 600 800 1000 1200
TR (£)
5000 4000 3000
5 5 5 5 5 5 5
TR
TR (£) 0 1000 2000 3000 4000 5000 6000
2000 1000 0 0
200
400
600
Quantity
800
1000
1200
Total revenue for a price-taking firm TR
6000
TR (£)
5000 4000 3000 2000 1000 0 0
200
400
600
Quantity
800
1000
1200
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 Q P (units) =AR (£) 8 1 7 2 6 3 5 4 4 5 3 6 2 7
8
AR, MR (£)
6
4
2
AR
0 1 -2
-4
2
3
4
5
6
7
Quantity
AR and MR curves for a firm facing a downward-sloping demand curve Q P (units) =AR (£) 8 1 7 2 6 3 5 4 4 5 3 6 2 7
8
AR, MR (£)
6
4
2
TR MR (£) (£) 8 6 14 4 18 2 20 0 20 -2 18 -4 14
AR
0 1
2
3
4
5
6
7
-2
-4
MR
Quantity
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 20
16
Quantity P = AR (units) (£)
TR (£)
12
1 2 3 4 5 6 7
8
4
TR (£)
8 7 6 5 4 3 2
8 14 18 20 20 18 14
5
6
0 0
1
2
3
4
Quantity
7
TR curve for a firm facing a downward-sloping D curve 20
16
Quantity P = AR (units) (£)
TR (£)
12
1 2 3 4 5 6 7
8
4
TR
TR (£)
8 7 6 5 4 3 2
8 14 18 20 20 18 14
5
6
0 0
1
2
3
4
Quantity
7
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 curve 8
Elastic Elasticity = -1
AR, MR (£)
6
4
Inelastic
2
AR
0 1
2
3
4
5
6
7
-2
-4
MR
Quantity
TR curve for a firm facing a downward-sloping D curve Elasticity = -1 20
tic
El
as
as
el
tic
In
16
TR
TR (£)
12
8
4
0 0
1
2
3
4
Quantity
5
6
7
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 • Using total curves – maximising the difference between TR and TC
Finding maximum profit using total curves 24
TR, TC, TΠ (£)
20 16 12 8 4 0 1 -4 -8
2
3
4
5
6
7
Quantity
Finding maximum profit using total curves 24
TR, TC, TΠ (£)
20 16
TR
12 8 4 0 1 -4 -8
2
3
4
5
6
7
Quantity
Finding maximum profit using total curves TC
24
TR, TC, TΠ (£)
20 16
TR
12 8 4 0 1 -4 -8
2
3
4
5
6
7
Quantity
Profit Maximisation • Using total curves – maximising the difference between TR and TC – the total profit curve
Finding maximum profit using total curves TC
24
TR, TC, TΠ (£)
20 16
TR
12 8 4 0 1
2
3
4
5
6
-4 -8
TΠ
7
Quantity
Finding maximum profit using total curves TC
24
b
TR, TC, TΠ (£)
20 16
TR
a
12 8 4
c
0 1
d 2
3
4
5
6
-4 -8
TΠ
7
Quantity
TR, TC, TΠ (£)
Finding maximum profit using total curves 24 22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8
TC d
TR
e
f
1
2
3
4
5
6
TΠ
7
Quantity
Profit Maximisation • Using total curves – maximising the difference between TR and TC – the total profit curve
• Using marginal and average curves
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 curves 16
Costs and revenue (£)
12
8
4
0 1 -4
2
3
4
5
6
7
Quantity
Finding the profit-maximising output using marginal curves 16
MC
Costs and revenue (£)
12
8
4
0 1 -4
2
3
4
5
6
7
Quantity
Finding the profit-maximising output using marginal curves 16
MC
Costs and revenue (£)
12
8
4
Profit-maximising output
e
0 1 -4
2
3
4
5
6
7
MR
Quantity
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 16
MC
Costs and revenue (£)
12
8
4
0 1 -4
2
3
4
5
6
7
MR
Quantity
Measuring the maximum profit using average curves 16
MC
Costs and revenue (£)
12
8
4
AR 0 1 -4
2
3
4
5
6
7
MR
Quantity
Measuring the maximum profit using average curves 16
MC Total profit = £1.50 x 3 = £4.50
Costs and revenue (£)
12
AC
8
a
6.00 TOTAL PROFIT b 4.50 4
AR 0 1 -4
2
3
4
5
6
7
MR
Quantity
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 MC
Costs and revenue (£)
AC
AC
LOSS AR
AR O
Q
MR
Quantity
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
Costs and revenue (£)
The short-run shut-down point
AC AVC
P= AVC
AR O
Q Quantity
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
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)
S
AR, MR (£)
Price (£)
Deriving a firm’s AR and MR: price-taking firm
Pe
D O
Q (millions)
(a) The market
O
Q (hundreds)
(b) The firm
S
AR, MR (£)
Price (£)
Deriving a firm’s AR and MR: price-taking firm
D = AR = MR
Pe
D O
Q (millions)
(a) The market
O
Q (hundreds)
(b) The firm
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 Quantity Price = AR (units) = MR (£)
6000
0 200 400 600 800 1000 1200
TR (£)
5000 4000 3000
5 5 5 5 5 5 5
2000 1000 0 0
200
400
600
Quantity
800
1000
1200
Total revenue for a price-taking firm Quantity Price = AR (units) = MR (£)
6000
0 200 400 600 800 1000 1200
TR (£)
5000 4000 3000
5 5 5 5 5 5 5
TR (£) 0 1000 2000 3000 4000 5000 6000
2000 1000 0 0
200
400
600
Quantity
800
1000
1200
Total revenue for a price-taking firm Quantity Price = AR (units) = MR (£)
6000
0 200 400 600 800 1000 1200
TR (£)
5000 4000 3000
5 5 5 5 5 5 5
TR
TR (£) 0 1000 2000 3000 4000 5000 6000
2000 1000 0 0
200
400
600
Quantity
800
1000
1200
Total revenue for a price-taking firm TR
6000
TR (£)
5000 4000 3000 2000 1000 0 0
200
400
600
Quantity
800
1000
1200
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 Q P (units) =AR (£) 8 1 7 2 6 3 5 4 4 5 3 6 2 7
8
AR, MR (£)
6
4
2
AR
0 1 -2
-4
2
3
4
5
6
7
Quantity
AR and MR curves for a firm facing a downward-sloping demand curve Q P (units) =AR (£) 8 1 7 2 6 3 5 4 4 5 3 6 2 7
8
AR, MR (£)
6
4
2
TR MR (£) (£) 8 6 14 4 18 2 20 0 20 -2 18 -4 14
AR
0 1
2
3
4
5
6
7
-2
-4
MR
Quantity
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 20
16
Quantity P = AR (units) (£)
TR (£)
12
1 2 3 4 5 6 7
8
4
TR (£)
8 7 6 5 4 3 2
8 14 18 20 20 18 14
5
6
0 0
1
2
3
4
Quantity
7
TR curve for a firm facing a downward-sloping D curve 20
16
Quantity P = AR (units) (£)
TR (£)
12
1 2 3 4 5 6 7
8
4
TR
TR (£)
8 7 6 5 4 3 2
8 14 18 20 20 18 14
5
6
0 0
1
2
3
4
Quantity
7
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 curve 8
Elastic Elasticity = -1
AR, MR (£)
6
4
Inelastic
2
AR
0 1
2
3
4
5
6
7
-2
-4
MR
Quantity
TR curve for a firm facing a downward-sloping D curve Elasticity = -1 20
tic
El
as
as
el
tic
In
16
TR
TR (£)
12
8
4
0 0
1
2
3
4
Quantity
5
6
7
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 • Using total curves – maximising the difference between TR and TC
Finding maximum profit using total curves 24
TR, TC, TΠ (£)
20 16 12 8 4 0 1 -4 -8
2
3
4
5
6
7
Quantity
Finding maximum profit using total curves 24
TR, TC, TΠ (£)
20 16
TR
12 8 4 0 1 -4 -8
2
3
4
5
6
7
Quantity
Finding maximum profit using total curves TC
24
TR, TC, TΠ (£)
20 16
TR
12 8 4 0 1 -4 -8
2
3
4
5
6
7
Quantity
Profit Maximisation • Using total curves – maximising the difference between TR and TC – the total profit curve
Finding maximum profit using total curves TC
24
TR, TC, TΠ (£)
20 16
TR
12 8 4 0 1
2
3
4
5
6
-4 -8
TΠ
7
Quantity
Finding maximum profit using total curves TC
24
b
TR, TC, TΠ (£)
20 16
TR
a
12 8 4
c
0 1
d 2
3
4
5
6
-4 -8
TΠ
7
Quantity
TR, TC, TΠ (£)
Finding maximum profit using total curves 24 22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8
TC d
TR
e
f
1
2
3
4
5
6
TΠ
7
Quantity
Profit Maximisation • Using total curves – maximising the difference between TR and TC – the total profit curve
• Using marginal and average curves
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 curves 16
Costs and revenue (£)
12
8
4
0 1 -4
2
3
4
5
6
7
Quantity
Finding the profit-maximising output using marginal curves 16
MC
Costs and revenue (£)
12
8
4
0 1 -4
2
3
4
5
6
7
Quantity
Finding the profit-maximising output using marginal curves 16
MC
Costs and revenue (£)
12
8
4
Profit-maximising output
e
0 1 -4
2
3
4
5
6
7
MR
Quantity
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 16
MC
Costs and revenue (£)
12
8
4
0 1 -4
2
3
4
5
6
7
MR
Quantity
Measuring the maximum profit using average curves 16
MC
Costs and revenue (£)
12
8
4
AR 0 1 -4
2
3
4
5
6
7
MR
Quantity
Measuring the maximum profit using average curves 16
MC Total profit = £1.50 x 3 = £4.50
Costs and revenue (£)
12
AC
8
a
6.00 TOTAL PROFIT b 4.50 4
AR 0 1 -4
2
3
4
5
6
7
MR
Quantity
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 MC
Costs and revenue (£)
AC
AC
LOSS AR
AR O
Q
MR
Quantity
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
Costs and revenue (£)
The short-run shut-down point
AC AVC
P= AVC
AR O
Q Quantity
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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