Lecture Notes: Revenue in Economics

Introduction to Revenue

• Definition: Revenue is the money made from sales by a business.
• Core Equations:
  • Total Revenue (TR): Price (P) multiplied by Quantity (Q)
    • Formula: TR = P × Q
  • Average Revenue (AR): Total Revenue divided by Quantity
    • Formula: AR = TR/Q -> Simplifies to AR = P
  • Marginal Revenue (MR): The extra revenue generated from selling one more unit
    • Formula: MR = Change in TR / Change in Q

Revenue Curves in Different Market Structures

• Perfect Competition:

  • Characteristics:
    • Many buyers and sellers (infinite)
    • Homogeneous goods and services
    • Price takers
    • No barriers to entry and exit
    • Perfect information
  • Implications for Revenue:
    • Firm is a price taker, sells at market price regardless of quantity.
    • TR is a linear upward sloping line, increasing by a constant amount.
    • AR = MR = Demand: Constant over a range of quantities.

• Imperfect Competition (e.g., Monopoly):

  • Characteristics:
    • Few buyers and sellers
    • Differentiated goods and services
    • Price makers
    • High barriers to entry and exit
    • Imperfect information
  • Implications for Revenue:
    • Firms can set prices.
    • Governed by the law of demand:
      • High price -> Low quantity sold
      • Low price -> High quantity sold
    • TR increases, peaks, then decreases.
    • MR starts positive, declines, can become negative.
    • AR is a downward sloping demand curve.
    • MR is twice as steep as AR.

Drawing the Curves

• Perfect Competition:

  • AR and MR are constant and equal to Demand.
  • TR is linear, upward sloping.

• Imperfect Competition:

  • AR is downward sloping, like a demand curve.
  • MR starts at the same point as AR but declines faster and can be negative.
  • TR increases at a decreasing rate, peaks where MR = 0, then decreases.

Relationship Between AR and Demand

• AR = Demand Curve:
  • Demand is a linear line with the equation: P = A - BQ
  • AR = Price, hence AR is equivalent to the demand.

Total Revenue Maximization

• TR maximized when MR = 0:
  • TR rises as long as MR is positive.
  • TR decreases when MR is negative.

Conclusion

• Concepts of revenue in perfect and imperfect competition were covered.
• Next topic: Profit, integrating costs and revenues.
• Stay tuned for the next video on profit.