3.4.6 - Marginal, Average and Total Revenue Flashcards
What is total revenue?
All the money received by a firm from selling its total output.
What is average revenue?
Total revenue divided by the output.
What is marginal revenue?
Addition to total revenue resulting from the sale of one more unit of the product.
What is the equation for average revenue?
Total revenue / Output = Average Revenue
What is marginal revenue?
∆Total Revenue / ∆ Output = Marginal Revenue
What is the relationship between price charged and average revenue?
The price charged is always equal to the average revenue.
What is perfect competition?
A market that contains the 6 conditions being:
Large number of buyers and sellers
Ability to buy or sell as much is desired at the market price
The inability of an individual buyer or seller to influence the market price
A uniform or homogeneous product
No barriers to entry for buyers or sellers in the long run
What is a monopoly?
One firm only in a market.
Where are monopolies present in the real world?
Nationalised services.
What types of countries are monopolies seen?
Communist countries.
What do marginal and average curves plotted from the same set of data always display?
When marginal is greater than the average, the average rises.
When marginal is equal to the average, the average does not change.
When marginal is less than the average, the average falls.
What does a firm’s revenue curves depends on in a market?
The competitiveness of the market.
Marginal and average revenue curves remain constant across monopolies or perfect competition markets. T/F?
False, they are different across the two market types.
What are the characteristics of a perfectly competitive market?
A large number of buyers and sellers.
All buyers and sellers possess perfect information about what is going on in the market.
Consumers can buy as much as they wish and firms can sell as much as they’d like at the ruling market price.
An individual consumer or supplier cannot affect the ruling market price through its own actions.
Homogeneous products.
No barriers to entry or exit.
What type of demand is found in a perfectly competitive market?
Perfectly elastic demand.
What is the relationship between the average revenue curves and marginal revenue curves in perfect competition?
The price set by the market is taken by individual firms.
What tends to happen in terms of firm size within perfectly competitive markets?
They are very small price takers.
Why should firms within perfectly competitive markets not lower or raise their price?
They do not benefit from any extra sales as a perfectly elastic good has infinite demand at the given price or below. To maximise profits, they should keep their price at the market equilibrium point.
If a firm raises their prices, they will suffer no sales and as a result will not experience any profits at all as customers desert the firm to find the homogeneous good from another firm at a lower price.
Why is a firm within a perfectly competitive market a price taker?
A perfectly competitive firm can sell whatever quantity it wishes at the ruling market price, but it cannot actually influence the market price by it’s own actions.
What does a horizontal demand curve mean in terms of average revenue and marginal revenue in a perfectly competitive market?
Demand is equal to the Average Revenue and the Marginal Revenue.
How will a monopolist increase quantity sold?
Reduce price from P1 to P2, to increase quantity from Q1 to Q2.
How will does total revenue change based on the change in price?
k - h
How does average revenue change based on the change in price?
k
How does marginal revenue change based on the change in price?
k - h
