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
Price (£)

AR, MR (£)
S

Pe

D
O O
Q (millions) Q (hundreds)

(a) The market (b) The firm

 Deriving a firm’s AR and MR: price-taking firm
Price (£)

AR, MR (£)
S

D = AR
Pe
= MR

D
O O
Q (millions) Q (hundreds)

(a) The market (b) The firm

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)
 Total revenue for a price-taking firm
6000 Quantity Price = AR
(units) = MR (£)

0 5
5000
200 5
400 5
600 5
4000
TR (£)

800 5
1000 5
1200 5
3000

2000

1000

0
0 200 400 600 800 1000 1200
Quantity
 Total revenue for a price-taking firm
6000 Quantity Price = AR TR
(units) = MR (£) (£)

0 5 0
5000
200 5 1000
400 5 2000
600 5 3000
4000
TR (£)

800 5 4000
1000 5 5000
1200 5 6000
3000

2000

1000

0
0 200 400 600 800 1000 1200
Quantity
 Total revenue for a price-taking firm
6000 Quantity Price = AR TR TR
(units) = MR (£) (£)

0 5 0
5000
200 5 1000
400 5 2000
600 5 3000
4000
TR (£)

800 5 4000
1000 5 5000
1200 5 6000
3000

2000

1000

0
0 200 400 600 800 1000 1200
Quantity
 Total revenue for a price-taking firm
6000
TR

5000

4000
TR (£)

3000

2000

1000

0
0 200 400 600 800 1000 1200
Quantity
Revenue
• Revenue curves when price varies
with output (downward-sloping
demand curve)
– average revenue (AR)

– marginal revenue (MR)

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

4 6 3
7 2

2 AR

0
1 2 3 4 5 6 7 Quantity

-2

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

4 6 3 18
-4
7 2 14

2 AR

0
1 2 3 4 5 6 7 Quantity

-2

-4 MR
Revenue
• Revenue curves when price varies
with output (downward-sloping
demand curve)
– average revenue (AR)

– marginal revenue (MR)

– total revenue (TR)

TR curve for a firm facing a downward-sloping D curve

20

16

Quantity P = AR TR
12
(units) (£) (£)
TR (£)

1 8 8
8 2 7 14
3 6 18
4 5 20
4 5 4 20
6 3 18
7 2 14
0
0 1 2 3 4 5 6 7
Quantity
TR curve for a firm facing a downward-sloping D curve

20

16

Quantity P = AR TR TR
12
(units) (£) (£)
TR (£)

1 8 8
8 2 7 14
3 6 18
4 5 20
4 5 4 20
6 3 18
7 2 14
0
0 1 2 3 4 5 6 7
Quantity
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
AR and MR curves for a firm facing a downward-sloping
demand curve
8
Elastic
Elasticity = -1
6
AR, MR (£)

4 Inelastic

2 AR

0
1 2 3 4 5 6 7 Quantity

-2

-4 MR
TR curve for a firm facing a downward-sloping D curve
Elasticity = -1
20

In
tic

el
as

as
El

tic
16

TR
12
TR (£)

0
0 1 2 3 4 5 6 7
Quantity
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

Profit Maximisation
• Using total curves
– maximising the difference between TR
and TC
 Finding maximum profit using total curves
24

20

16
TR, TC, TΠ (£)

12

0
1 2 3 4 5 6 7 Quantity
-4

-8
 Finding maximum profit using total curves
24

20

16
TR, TC, TΠ (£)

TR
12

0
1 2 3 4 5 6 7 Quantity
-4

-8
 Finding maximum profit using total curves
24 TC

20

16
TR, TC, TΠ (£)

TR
12

0
1 2 3 4 5 6 7 Quantity
-4

-8
Profit Maximisation
• Using total curves
– maximising the difference between TR
and TC
– the total profit curve
 Finding maximum profit using total curves
24 TC

20

16
TR, TC, TΠ (£)

TR
12

0
1 2 3 4 5 6 7 Quantity
-4

-8 TΠ
 Finding maximum profit using total curves
24 TC
b
20

16
TR, TC, TΠ (£)

a TR
12

c d
0
1 2 3 4 5 6 7 Quantity
-4

-8 TΠ
 Finding maximum profit using total curves
24 TC
22
20
d
18
16
TR, TC, TΠ (£)

14
e TR
12
10
8
6
4 f
2
0
-2 1 2 3 4 5 6 7 Quantity
-4
-6
-8 TΠ
Profit Maximisation
• Using total curves
– maximising the difference between TR
and TC
– the total profit curve
• Using marginal and average curves
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
 Finding the profit-maximising output using marginal curves
16

12
Costs and revenue (£)

0
1 2 3 4 5 6 7
Quantity

-4
 Finding the profit-maximising output using marginal curves
16
MC

12
Costs and revenue (£)

0
1 2 3 4 5 6 7
Quantity

-4
 Finding the profit-maximising output using marginal curves
16
MC

12
Costs and revenue (£)

4 e Profit-maximising
output

0
1 2 3 4 5 6 7
Quantity

-4 MR
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
 Measuring the maximum profit using average curves
16 MC

12
Costs and revenue (£)

0
1 2 3 4 5 6 7
Quantity

-4 MR
 Measuring the maximum profit using average curves
16 MC

12
Costs and revenue (£)

AR
0
1 2 3 4 5 6 7
Quantity

-4 MR
 Measuring the maximum profit using average curves
16 MC
Total profit =
12 £1.50 x 3 = £4.50
Costs and revenue (£)

8 AC
a
6.00
TOTAL PROFIT b
4.50
4

AR
0
1 2 3 4 5 6 7
Quantity

-4 MR
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
 Loss-minimising output
MC

AC
Costs and revenue (£)

AC
LOSS
AR

AR
O Q
Quantity
MR
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
Costs and revenue (£) The short-run shut-down point

P= AC
AVC
AVC

AR
O Q
Quantity
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