Revenue theory (HL only)
This lesson focuses on more definitions of costs and revenue and contains a number of paper three type questions. Learning by doing is an effective way for your students to learn the primary concepts.
Understanding the terms total revenue, average revenue and marginal revenue
Lesson time: 55 minutes
Distinguish between total revenue, average revenue and marginal revenue.
Draw diagrams illustrating the relationship between total revenue, average revenue and marginal revenue.
Calculate total revenue, average revenue and marginal revenue from a set of data and / or diagrams.
What is meant by the term revenue? What is the difference between revenue and profit?
Total revenue (TR) is the total revenue produced by a firm, measured in monetary terms usually in $. This is also sometimes called sales revenue. It is calculated by selling price or average revenue multiplied by output.
Marginal revenue (MR) is the additional revenue generated when one good or service is added. As output is increased the MR will fall sharply as the supply of the product has risen. In economics we presume that as a good becomes less scarce its price will fall. MR is calculated by the formulae Δ TR / Δ Q.
Average revenue (AR) is the average revenue produced per unit of output. Like MR, average revenue also falls as output rises but does so at exactly half the rate of decline of MR i.e. the downward slope of the AR curve falls at half the gradient of the MR curve.
The activities on this page can be downloaded as a PDF file at: Revenue theory
(a) A firm is looking to increase its sales revenue and is producing a PED elastic good. What course of action should the business take?
(b) A firm is looking to increase its sales revenue and is producing a PED inelastic good. What course of action should the business take?
(c) If a theoretical business was producing a perfectly elastic good (PED = infinity) then explain what will happen to both MR and AR as the firm raises its output?
(a) Complete the following table by adding the missing blanks:
|Selling price $ (AR)||Number of workers required||Quantity sold||Total revenue ($)||Marginal revenue ($)||Price elasticity of demand (PED)|
Complete the table by filling in the missing blanks in the table:
|Selling price (AR) $||Number of workers required||Quantity sold||Total revenue ($)||Marginal revenue ($)||Price elasticity of demand (PED)|
Draw on a piece of graph paper the MR and AR curves.
(a) Complete the following table:
Total revenue $ (000)
Total cost $ (000)
Total profit $ (000)
(b) Illustrate the level of output at the profit maximising point
(c) Illustrate the level of output at the revenue maximising point
Activity 5: Reflection
Why are the profit maximising and revenue maximising levels of output different? Shouldn't profit also be maximised where revenue is at it's highest.