IBECONUAHS - KELCEY

Revenues: Total, Marginal, and Average

Definitions:

Revenue: money going to a firm from selling goods: product of price X quantity sold
Total revenue (TR): the price of the good times the amount sold: P X Q=TR
Marginal revenue (MR): the addition to total revenue: MR=TR1-TR; the revenue gained from selling one more unit of a good
Average revenue (AR): the total revenue divided by the quantity sold: AR=TR/Q

Assumptions:

TR for a monopoly firm: the firm can set any price and the pattern of demand will determine output
TR for a perfectly competitive firm: the firm is a price taker, so they have to accept the price
MR for a competitive firm: P=MR
MR for a monopoly firm: MR is always lower than AR (the price) and it is decreasing along with the demand curve
AR for a perfectly competitive firm: P=AR
AR for a monopoly firm: P=AR=D; the demand is equal to the average revenue curve; in the long-run

Diagrams:

Total Revenue

Marginal Revenue: Perfect Competition; Short-Run

Marginal Revenue- Monopoly

Average Revenue: Perfect Competition

Average Revenue: Monopoly

Example:

The TR in a monopoly firm: a firm can set the price at $10, for example so the peak on the graph above would be $2,000
The TR in a PC firm: the quantity changes as the price changes, which is through a market price that the firm is not involved in
MR in a PC firm: the marginal revenue is the price that is the demand for the good so when the P=$10, then MR also equals $10
MR in a monopoly firm: if the firm begins at a price of $20 and is moving towards $15, the TR goes from $0 to $15 and the MR= $15
AR in a PC firm: it is equal to the P and the MR, so with the same above example, if the P=$10, then AR=$10
AR in a monopoly firm: it follows the demand curve, so if the price is $10 on the demand curve then AR=$10

KELCEY - Revenues