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Revenue and Profit

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 ). Deriving a firm’s AR and MR: price-taking firm. P e.

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Revenue and Profit

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  1. Revenue and Profit

  2. 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)

  3. Deriving a firm’s AR and MR: price-taking firm Pe Price (£) S AR, MR (£) D O O Q (millions) Q (hundreds) (a) The market (b) The firm

  4. Deriving a firm’s AR and MR: price-taking firm Price (£) S AR, MR (£) D = AR = MR Pe D O O Q (millions) Q (hundreds) (a) The market (b) The firm

  5. 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)

  6. Total revenue for a price-taking firm Quantity (units) Price = AR = MR (£) 0 200 400 600 800 1000 1200 5 5 5 5 5 5 5 TR (£) Quantity

  7. Total revenue for a price-taking firm Quantity (units) Price = AR = MR (£) TR (£) 0 200 400 600 800 1000 1200 5 5 5 5 5 5 5 0 1000 2000 3000 4000 5000 6000 TR (£) Quantity

  8. Total revenue for a price-taking firm TR Quantity (units) Price = AR = MR (£) TR (£) 0 200 400 600 800 1000 1200 5 5 5 5 5 5 5 0 1000 2000 3000 4000 5000 6000 TR (£) Quantity

  9. Total revenue for a price-taking firm TR TR (£) Quantity

  10. Revenue • Revenue curves when price varies with output (downward-sloping demand curve) • average revenue (AR) • marginal revenue (MR)

  11. AR and MR curves for a firm facing a downward-slopingdemand curve Q (units) P =AR (£) 8 7 6 5 4 3 2 1 2 3 4 5 6 7 AR, MR (£) AR Quantity

  12. AR and MR curves for a firm facing a downward-slopingdemand curve Q (units) TR (£) MR (£) P =AR (£) 8 7 6 5 4 3 2 8 14 18 20 20 18 14 1 2 3 4 5 6 7 6 4 2 0 -2 -4 AR, MR (£) AR Quantity MR

  13. Revenue • Revenue curves when price varies with output (downward-sloping demand curve) • average revenue (AR) • marginal revenue (MR) • total revenue (TR)

  14. TR curve for a firm facing a downward-sloping D curve Quantity (units) P = AR (£) TR (£) 1 2 3 4 5 6 7 8 7 6 5 4 3 2 8 14 18 20 20 18 14 TR (£) Quantity

  15. TR curve for a firm facing a downward-sloping D curve TR Quantity (units) P = AR (£) TR (£) TR (£) 1 2 3 4 5 6 7 8 7 6 5 4 3 2 8 14 18 20 20 18 14 Quantity

  16. 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

  17. AR and MR curves for a firm facing a downward-slopingdemand curve Elastic Elasticity = -1 Inelastic AR, MR (£) AR Quantity MR

  18. TR curve for a firm facing a downward-sloping D curve Elasticity = -1 Elastic Inelastic TR TR (£) Quantity

  19. 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

  20. Profit Maximisation • Using total curves • maximising the difference between TR and TC

  21. Finding maximum profit using total curves TR, TC, TP(£) Quantity

  22. Finding maximum profit using total curves TR TR, TC, TP(£) Quantity

  23. Finding maximum profit using total curves TC TR TR, TC, TP(£) Quantity

  24. Profit Maximisation • Using total curves • maximising the difference between TR and TC • the total profit curve

  25. Finding maximum profit using total curves TC TR TR, TC, TP(£) Quantity TP

  26. Finding maximum profit using total curves TC b TR a TR, TC, TP(£) c d Quantity TP

  27. Finding maximum profit using total curves d e f TC TR TR, TC, TP(£) Quantity TP

  28. Profit Maximisation • Using total curves • maximising the difference between TR and TC • the total profit curve • Using marginal and average curves

  29. 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

  30. Finding the profit-maximising output using marginal curves Costs and revenue (£) Quantity

  31. Finding the profit-maximising output using marginal curves MC Costs and revenue (£) Quantity

  32. Finding the profit-maximising output using marginal curves Profit-maximising output e MC Costs and revenue (£) Quantity MR

  33. 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

  34. Measuring the maximum profit using average curves MC Costs and revenue (£) Quantity MR

  35. Measuring the maximum profit using average curves MC Costs and revenue (£) AR Quantity MR

  36. Measuring the maximum profit using average curves a 6.00 b 4.50 MC Total profit = £1.50 x 3 = £4.50 AC Costs and revenue (£) T O T A L P R O F I T AR Quantity MR

  37. 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

  38. Loss-minimising output MC AC AC LOSS AR AR Q MR Costs and revenue (£) O Quantity

  39. 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

  40. The short-run shut-down point AC P = AVC AVC AR Q Costs and revenue (£) O Quantity

  41. 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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