Revenue

Revenue  Revenue is the money received from the sale of goods and services.

World’s biggest firms based on revenue  1. Wal Mart  2. Sinopec  3. China National Petroleum Corporation  4. Shell  5. Exxon Mobil  6. BP

Walmart’s revenue…  Greater than the GDP of Nigeria, Portugal or Israel.  If the largest firms’ revenue was compared to countries GDP, 49 of the biggest country/firms would be firms, not countries.

Five biggest Swiss firms (2012)

Five biggest Swiss firms  1. Glencore  2. Nestle  3. Novartis  4. Zurich Insurance  5. Roche

Revenue  Average Revenue: Total revenue divided by sales  Marginal Revenue: The money from selling one extra unit of output.

 If price is constant, average revenue will be the same as marginal revenue.

Swiss Farmers  There are about 7,000 milk farmers in Switzerland.

 Since the beginning of 2009, the price of milk in Switzerland has fallen by an average of 30 per cent. Swiss farmers currently earn SFr0.55 ($0.58) for each litre of milk produced - half the amount of ten years ago.

Farmer selling milk to a dairy  If he sells 4,000 litres of milk – what is his average revenue, marginal revenue and total revenue?

Average Revenue = Marginal Revenue

 $2,  Cocoa beans, US$ per metric tonne  Monday, April 29, 2013

Number of tonnes Average Revenue Marginal Revenue Total Revenue

Number of tonnes Average Revenue Marginal Revenue Total Revenue 1$2, $4, $2, $7, $2, $9, $2, $11, $2, $14, $2, $16,506.77

BMW 6 Series

Number of carsAverage Revenue Marginal Revenue Total Revenue

Number of carsAverage Revenue Marginal Revenue Total Revenue 1120,000110,000120, ,000100,000220, ,00090,000300, ,00080,000360, ,00070,000400, ,00060,000420, ,00050,000420, ,00040,000400, ,00030,000360, ,000300,000

Total revenue curve  How does this total revenue curve make sense?

 €13 a ticket.

Average Revenue, Marginal Revenue when price is not constant.  If the price is not constant, the average revenue and marginal revenues are not equal.

 Instead of a milk farmer, consider an airline selling tickets on a flight from New York to London. They can sell some tickets for $600, but others they will have to be happy to sell for maybe $300.

 An Irish potato farmer increases output.  A Justin Bieber concert promoter changes venue for a Bieber concert from a 10,000 capacity venue to a 20,000 capacity venue.  Explain, with the aid of diagrams, how this might have different impacts on the two firms’ total revenues.

 In the case of the airline selling tickets, the average and marginal revenues will be very different.

Average Revenue, Marginal Revenue when price is not constant.

 A firm switches from Profit Maximisation

Profit  Profit is the difference between revenue and costs.

 At 1000 units, Firm ABC is covering all its ATC (including the entrepreneur’s return). Therefore, it will stay in the business.

Normal Profit  Normal profit is the minimum level of profit needed so that a firm will remain in the market.

 Normal profit occurs at the point at which the resources available to the firm are being efficiently used and could not be put to better use elsewhere.

Normal Profit  Imagine you invest $100,000 in a business. At the end of the business year, you make a `profit` of $5,000.  Accountants consider that a profit.  However, economists have to consider the opportunity cost. What if you could have made 6% interest on the $100,000?  You are not making normal profit, so economic theory would predict you would not continue in business.

Normal Profit  The profit that the firm could make by using its resources in the next best use. Normal profit is an economic cost.  Profits above this tend to stimulate entry to the market, profits below tend to persuade firms to leave the industry.

Profit  The profit maximising point is where marginal revenue equals marginal cost.

Marginal Revenue and Marginal Cost

 In this market, average revenue is equal to marginal revenue. So it is milk, not airline tickets.  Between O and N, the firm is making a loss.  Beyond M, the marginal cost is higher than the marginal revenue, so there is no point in producing beyond that point. So a profit maximising firm will produce at point E.

 Abnormal (or supernormal or economic) profit – the profit over and above normal profit.