3.14 Operational Strategies: location Revenue

Candidates should be able to: Syllabus Candidates should be able to: Define total revenue, average revenue and marginal revenue Perform simple calculations using total, average and marginal revenue Draw and interpret revenue curves Analyse the relationships between total revenue, price elasticity of demand and marginal revenue (calculation required)

Definitions – revenue and total revenue What is revenue? What are the other names for revenue? Revenue depends on the p______ and q_________ What is the formula for total revenue (TR)?

Definitions – average and marginal revenue What is average revenue (AR)? If all output is sold at the same price, then what must average revenue equal? What is marginal revenue (MR)?

Example of marginal revenue If total revenue was £70 million when 7 machines were sold but £76 million when 8 machines were sold then what is the marginal revenue from the last machine sold? Assume all output is sold at the same price, what is the AR when 7 machines were sold? What is the AR for 8 machines? Comment on your answers.

Revenue explanation when prices are fixed The TR curve is ________ sloping as sales increase AR and MR curves are _______ when sales increase. Because the price of the good remains the same, the AR and MR curves are ____________ The line for AR and MR is horizontal, showing that whatever the level of output, AR and MR remain the same at £__ The AR curve is the demand curve, because it shows the relationship between average price and quantity sold. So, at any quantity sold, MR = AR = D

Revenue explanation when a firm has to lower prices to increase sales AR, or average price, is _______ as sales get larger. When sales reach __ units, TR begins to fall. The loss in revenue from having to accept a _____ price more than outweighs the increase in revenue from extra sales. So, MR becomes ________. Each extra unit sold brings in negative extra revenue. The TR curve at first ______ and then _______. The AR and MR curves are _________ sloping. The MR curve slopes _______ as steeply as the AR curve. The AR curve is also the demand curve because it shows the relationship between average price and quantity sold. So AR = D

PED explanation when prices are fixed When the price received by a firm for a good is constant, the AR, MR and demand curves for the good are __________. This means that PED for the good is perfectly ________. Whatever the % change in quantity demanded for the good, there is _______ change in price of the good. Sketch a diagram showing AR, MR and TR when prices are fixed

Price strategy when prices are fixed The firm in the perfectly competitive market is a price taker (see 3.4.2) It does not have to _________ its price to sell more. It can sell all of its output at £5 It has a perfectly ________ demand curve It represents a very ______ firm in a large industry. They could increase output without affecting the total industry supply (so no effect on _____ (This only really happens in theory but it is a useful model)

PED explanation when a firm has to lower prices to increase sales When the price of a good falls as sales increase, there is likely to be a ________ in PED along the AR curve. Up to _ units, demand is price elastic because falls in price are resulting in ______ in TR. Above this, demand is price ________. Falls in price result in falls in TR. For MR, demand is price elastic when MR is ________ (rising TR). If MR is negative, demand is price _______ The AR curve is also the demand curve. The top half of the curve shows demand as price elastic, the bottom half of the curve shows inelastic PED. PED = 1 (unitary) when total revenue is maximised. This is when MR = 0

Summary of formula again (!) and link between AR and MR Write down the formula for total revenue, average revenue, marginal revenue and PeD What is the link between AR and MR? Which is steepest? By how much?