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Revenue
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Revenue Revenue is the money received from the sale of goods and services.
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World’s biggest firms based on revenue - 2014. 1. Wal Mart 2. Sinopec 3. China National Petroleum Corporation 4. Shell 5. Exxon Mobil 6. BP
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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.
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Five biggest Swiss firms (2012)
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Five biggest Swiss firms 1. Glencore 2. Nestle 3. Novartis 4. Zurich Insurance 5. Roche
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Revenue Average Revenue: Total revenue divided by sales Marginal Revenue: The money from selling one extra unit of output.
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If price is constant, average revenue will be the same as marginal revenue.
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Swiss Farmers There are about 7,000 milk farmers in Switzerland.
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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.
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Farmer selling milk to a dairy If he sells 4,000 litres of milk – what is his average revenue, marginal revenue and total revenue?
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Average Revenue = Marginal Revenue
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$2,358.11 Cocoa beans, US$ per metric tonne Monday, April 29, 2013
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Number of tonnes Average Revenue Marginal Revenue Total Revenue 1 2 3 4 5 6 7
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Number of tonnes Average Revenue Marginal Revenue Total Revenue 1$2,358.11 2 $4,716.22 3$2,358.11 $7,074.33 4$2,358.11 $9,432.44 5$2,358.11 $11,318.93 6$2,358.11 $14,148.66 7$2,358.11 $16,506.77
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BMW 6 Series
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Number of carsAverage Revenue Marginal Revenue Total Revenue 1 2 3 4 5 6 7
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Number of carsAverage Revenue Marginal Revenue Total Revenue 1120,000110,000120,000 2110,000100,000220,000 3100,00090,000300,000 490,00080,000360,000 580,00070,000400,000 670,00060,000420,000 760,00050,000420,000 850,00040,000400,000 940,00030,000360,000 1030,000300,000
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Total revenue curve How does this total revenue curve make sense?
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€13 a ticket.
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Average Revenue, Marginal Revenue when price is not constant. If the price is not constant, the average revenue and marginal revenues are not equal.
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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.
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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.
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In the case of the airline selling tickets, the average and marginal revenues will be very different.
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Average Revenue, Marginal Revenue when price is not constant.
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A firm switches from Profit Maximisation
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Profit Profit is the difference between revenue and costs.
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At 1000 units, Firm ABC is covering all its ATC (including the entrepreneur’s return). Therefore, it will stay in the business.
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Normal Profit Normal profit is the minimum level of profit needed so that a firm will remain in the market.
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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.
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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.
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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.
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Profit The profit maximising point is where marginal revenue equals marginal cost.
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Marginal Revenue and Marginal Cost
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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.
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Abnormal (or supernormal or economic) profit – the profit over and above normal profit.
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