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Business Revenues

Business Revenues. Total revenue Average revenue Marginal revenue Revenue and elasticity of demand. Revenue concepts. Revenue (or turnover) is the income generated from the sale of output in product markets. There are two main revenue concepts to grasp at this stage:

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Business Revenues

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  1. Business Revenues Total revenue Average revenue Marginal revenue Revenue and elasticity of demand

  2. Revenue concepts • Revenue (or turnover) is the income generated from the sale of output in product markets. • There are two main revenue concepts to grasp at this stage: • Average Revenue (AR) = Price per unit = total revenue / output • Marginal Revenue (MR) = the change in revenue from selling one extra unit of output • Total revenue (TR) = price per unit x output

  3. Numerical example

  4. Numerical example

  5. Marginal & Average Revenue Revenue P1 Average revenue P2 Q1 Q2 Output

  6. Marginal & Average Revenue Revenue P1 Lost revenue from lower price Average revenue P2 Increased revenue from selling more Q1 Q2 Output

  7. Marginal & Average Revenue Revenue P1 Average revenue P2 Marginal revenue Q1 Q2 Output

  8. Maximising Total Revenue Total revenue maximised when MR = zero Revenue P1 AR Output Q1 MR

  9. A Shift in Revenue Curves Revenue AR2 AR1 MR2 Output MR1

  10. Importance of revenues • Revenues affect the profitability of a business • When demand is price inelastic, a fall in price causes a fall in TR (marginal revenue will be negative) • The elasticity of demand (AR) has an effect on the profit margins of businesses in competitive and concentrated markets • When demand is perfectly elastic, then the AR and the MR curves are the same

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