Beruflich Dokumente
Kultur Dokumente
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)
AR, MR (£)
S
D = AR
Pe
= MR
D
O O
Q (millions) Q (hundreds)
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)
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)
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)
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)
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