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Revenue (Edexcel A Level Economics A)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Total, Average & Marginal Revenue

  • Total revenue is the total value of all sales a firm incurs

      Total space revenue space left parenthesis TR right parenthesis space equals space selling space price space left parenthesis straight P right parenthesis space cross times space quantity space sold left parenthesis straight Q right parenthesis

  • Average revenue is the overall revenue per unit

Average space revenue space left parenthesis AR right parenthesis space equals space TR over straight Q

  • Marginal revenue is the extra revenue received from the sale of an additional unit of output

Marginal space revenue space left parenthesis MR right parenthesis space equals space fraction numerator increment space in space TR over denominator increment space in space straight Q end fraction

  • The relationship between TR, AR & MR is different in perfect competition and imperfect competition

Perfect competition

The Relationship Between TR, AR and MR In Perfect Competition Can Be Seen Numerically Below

P (£)

Q

TR left parenthesis straight P cross times straight Q right parenthesis

AR space TR over straight Q

MR Error converting from MathML to accessible text.

8

5

40

8

8

8

6

48

8

8

8

7

56

8

8

8

8

64

8

 8

  • The situation in the table above is illustrated in the diagram below

3-3-1-revenue-in-perfect-competition_edexcel-al-economics
An illustration of the relationship between AR, MR and TR

Observations

  •  The firm is a price taker at P1 (£8)

    • Every unit of output is sold at the same price

    • A higher price would decrease sales to zero

    • A lower price would result in all sellers lowering their price

  • TR increases at a constant rate

  • MR = AR = Demand

Imperfect competition

The Relationship Between TR, AR & MR For Imperfect Competition Can Be Seen Numerically Below

P (£)

Q

TR left parenthesis straight P cross times straight Q right parenthesis

AR begin mathsize 14px style space TR over straight Q end style

MR Error converting from MathML to accessible text.

8

1

8

8

8

7

2

14

7

6

6

3

18

6

4

5

4

20

5

2

4

5

20

4

0

3

6

18

3

-2

2

7

14

2

-4

1

8

8

1

-6

  • The situation in the table above is illustrated in the diagram below

3-3-1-revenue-in-imperfect-competition_edexcel-al-economics
An illustration of the relationship between AR, MR & TR for imperfect competition

Observations

  •  The firm is a price maker 

    • In order to sell an additional unit of output, the price (AR) must be lowered

    • Both AR & MR fall with additional units of sale

    • When the AR falls, the MR falls by twice as much

      • The gradient of the MR curve is twice as steep as the AR curve

    • TR is maximised when MR = 0

  • AR is the demand (D) curve

  • When MR = 0, then the price elasticity of demand (PED) = 1

    • This is unitary elasticity

PED & Total Revenue

  • The total revenue rule states that in order to maximise revenue, firms should increase the price of products that are inelastic in demand and decrease prices on products that are elastic in demand 

  • This can be illustrated using an average revenue (AR) curve which is the demand curve

3-3-1-elastic-ar_edexcel-al-economics
An illustration of price elastic demand where a small decrease in price from P1→P2 causes a large increase in quantity demanded from Q1→ Q2

Observations

  • When a good/service is price elastic in demand, there is a greater proportional increase in the quantity demanded to a decrease in price

  • TR is higher once the price has been decreased

    • left parenthesis straight P subscript 2 cross times straight Q subscript 2 right parenthesis space greater than space left parenthesis straight P subscript 1 cross times straight Q subscript 1 right parenthesis

3-3-1-inelastic-ar_edexcel-al-economics
An illustration of price inelastic demand where a large increase in price from P1→P2 causes a small decrease in quantity demanded from Q1→ Q2

Observations

  • When a good/service is price inelastic in demand, there is a smaller than proportional decrease in the quantity demanded to an increase in price

  • TR is higher once the price has been increased

    • left parenthesis straight P subscript 2 cross times straight Q subscript 2 right parenthesis space greater than space left parenthesis straight P subscript 1 cross times straight Q subscript 1 right parenthesis

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Jenna Quinn

    Author: Jenna Quinn

    Expertise: Head of New Subjects

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.