Summary
Understanding revenue involves calculating and analyzing total, average, and marginal revenues, and recognizing how price elasticity of demand affects revenue.
- Total Revenue (TR) — The total amount of money received from selling a specific quantity of output. Example: If a company sells 100 machines at an average price of 100 million.
- Average Revenue (AR) — The average amount received per unit sold. Example: If total revenue is 1 million.
- Marginal Revenue (MR) — The additional amount received from selling an extra unit of output. Example: If total revenue increases from 910 million when selling one more machine, the marginal revenue from the last machine sold is $10 million.
- Price Elasticity of Demand — A measure of how much the quantity demanded of a good responds to a change in price. Example: If demand is price elastic, a price reduction increases total revenue.
Exam Tips
Key Definitions to Remember
- Total Revenue
- Average Revenue
- Marginal Revenue
- Price Elasticity of Demand
Common Confusions
- Confusing average revenue with total revenue
- Misunderstanding the relationship between marginal revenue and price elasticity
Typical Exam Questions
- Draw the total revenue curve when price is constant? The curve is a straight line, indicating constant revenue per unit.
- If price elasticity of demand is elastic, what happens to revenue when price falls? Revenue increases because the percentage increase in quantity demanded is greater than the percentage decrease in price.
What Examiners Usually Test
- Ability to calculate and interpret total, average, and marginal revenues
- Understanding the impact of price elasticity on revenue changes