AS: 3.1.3 Production, costs and revenue 1.3.5 Average revenue, total revenue and profit Using your knowledge of total and average costs write a definition for total and average revenues. AS: 3.1.3 Production, costs and revenue Y1: 4.1.4 Production, costs and revenue

1.3.5 Average revenue, total revenue and profit The difference between average and total revenue Why the average revenue curve is the firm’s demand curve Profit is the difference between total revenue and total costs You should be able to calculate average, total revenue and profit from given data

Total and average revenue Total Revenue (TR) is money received by a firm from the sale of goods or services: TR = Q x P Average Revenue (AR) is total revenue divided by output: AR = TR/Q

Why is the average revenue curve the demand curve? Example P £10, Q = 20 TR = £10 x 20 = £200 AR = £10 x 20/20 or £200/20 = £10 Therefore: P = £10 is the same as AR = £10 This is why AR = P Step 1: Average revenue = total revenue/quantity Step 2: Total revenue = price x quantity Step 3: Average revenue = price x quantity/quantity Step 4: Quantity cancels out and we are left with: Average revenue = price Step 4: The demand curve shows the quantity demanded for a good, at any given price, over a period of time Therefore the average revenue curve is the same as the demand curve In imperfectly competitive markets the demand curve shows that a reduction in price leads to an increase in demand. In other words, to sell more of a good or service, the firm will have to lower price.

Normal Profit Profit is the difference between total revenue and total costs Profit = TR - TC Normal profit is that level of profit required for a firm to maintain operations This takes into account the opportunity cost of the firm’s operations It is the level of profit that is just sufficient for the firm to remain in the industry in the long run This suggests that it is more attractive to remain in this market than move into others Normal profit is seen as a cost of production

Supernormal profit Supernormal profit is that level of profit over and above normal profit This occurs where AR>AC Supernormal profit is an important element of imperfect markets and occurs because firms have some form of monopoly power It will attract the entry of new firms into the market looking to share in these additional profits

How the objectives of a firm impact on profit The objectives of a firm will have a significant bearing on its profit: Profit maximising firms will aim to make supernormal profits in imperfectly competitive markets Sales maximisation will mean that the firm might still make supernormal profit but not at the maximum level Again, a firm that profit satisfices might still make supernormal profit but not at the maximum level What might the financial objectives be for Airbus? http://www.bbc.co.uk/news/business-33375915 Airbus signs deal for second plant in China

Calculating average revenue, total revenue and profit from given data Q P 10 1 9 2 8 3 7 4 6 5 Q AR TR AC TC Profit The demand for a good at various prices is shown in Table 1. A variety of costs and revenues can be found in Table 2. Fixed costs are £8 and variable costs are £2 per unit. Calculate AR, TR, AC, TC and profit from the given data. Table 1 Table 2

Calculating average revenue, total revenue and profit from given data Q AR TR AC TC Profit - 8 1 9 10 -1 2 16 6 12 4 3 7 21 4.7 14 24 5 30 3.6 18 3.3 20 3.1 22 -8 2.9 26 -17 2.8 28 -28 Use the data to draw: A demand curve An average cost curve The demand for a good at various prices is shown in Table 1. A variety of costs and revenues can be found in Table 2. Fixed costs are £8 and variable costs are £2 per unit. Calculate AR, TR and profit from the given data 1. Q = 0 to 10 2. TR = Q x P e.g. 2 x £8; 3 x £7 etc. 3. AR = TR/Q 4. TC = FC + VC e.g. At a quantity of 4: FC = £8, VC = 4 x £2, TC = £16 5. AC = TC/Q