Total Revenue (TR): TR = Price x Quantity Sold

• Total revenue is the revenue received from the sale of a given level of output. It is calculated by multiplying the price at which each unit is sold by the quantity of units sold.

Average Revenue (AR): AR = Total Revenue / Quantity Sold

• Average revenue is the average receipt per unit, which is the total revenue divided by the quantity sold. In other words, it represents the price at which each unit is sold.

Marginal Revenue (MR): MR = Change in Total Revenue / Change in Quantity

• Marginal revenue is the extra revenue earned from the sale of one additional unit. It is calculated by finding the difference in total revenue between different levels of output and dividing it by the change in quantity.

Total Revenue (TR): TR = Price x Quantity Sold

Total revenue is determined by multiplying the price at which each unit of a product or service is sold by the quantity of units sold. It represents the overall revenue generated from the sales of a specific level of output.

Average Revenue (AR): AR = Total Revenue (TR) / Quantity Sold

Average revenue (AR) is calculated by dividing the total revenue (TR) by the quantity of units sold. In essence, it represents the average income or price per unit of a product or service.

In markets where firms are price takers, the average revenue curve (AR) is horizontal and perfectly elastic. This means that each unit of the good is sold at the same price, and the firm has no control over the price. The AR curve coincides with the demand curve in such markets, reflecting the uniform price for all units.

Marginal Revenue (MR): Marginal revenue is the additional revenue a firm earns from selling one additional unit of its product. When marginal revenue is equal to zero (MR = 0), total revenue is maximized.

The point where marginal revenue (MR) equals zero corresponds to the midpoint of the average revenue (AR) curve, which is often in the middle of the demand curve. At this point, price elasticity of demand (PED) is equal to 1. This means that any price increase or decrease around this point would lead to a decrease in total revenue (TR).

This is a key concept in understanding how firms make decisions about pricing and production, as it helps identify the point at which they maximize their total revenue.

Accounting Profit: Accounting profit is calculated by subtracting total monetary costs (explicit costs) from total monetary revenue. In other words, it is the revenue earned by a firm minus the actual expenses it incurs. Accounting profit is typically higher than economic profit because it does not take into account the opportunity costs of production.

Economic Profit: Economic profit, on the other hand, considers both the explicit (monetary) costs and the opportunity costs of production. Opportunity costs are the foregone returns or profits that could have been earned from the best alternative use of resources. Economic profit is often lower than accounting profit because it deducts these opportunity costs from the total revenue.

Normal Profit: Normal profit is the minimum reward required to keep entrepreneurs supplying their enterprise. It covers the opportunity cost of investing funds into the firm rather than elsewhere. Normal profit occurs when total revenue (TR) equals total costs (TC), resulting in no net profit or loss. Normal profit is considered a cost because it represents the entrepreneur's return on investment, and it is included in the costs of production.

Supernormal Profit: Supernormal profit, also known as abnormal profit, is the profit that exceeds normal profit. It occurs when total revenue (TR) is greater than total costs (TC). Supernormal profit is a signal that a firm is earning more than what is necessary to cover its costs, including the opportunity cost of the entrepreneur's capital. In the short run, supernormal profit can be maximized at the level of output where marginal cost (MC) equals marginal revenue (MR).

Losses: A firm incurs losses when its total revenue (TR) is less than its total costs (TC). In this situation, the firm is not earning enough to cover all its expenses, including the opportunity cost of the entrepreneur's capital.

The short-run profit maximization rule for firms is to produce at a level of output where marginal cost (MC) equals marginal revenue (MR). This is because, at this point, the firm is maximizing its contribution to profit. If MR is greater than MC, producing more units will increase profit. If MR is less than MC, reducing production will increase profit.

Break-Even Point: The break-even point is the level of output at which a firm's total revenue (TR) equals its total costs (TC). At this point, the firm is neither making a profit nor incurring a loss. It's essentially covering all its costs but not generating any surplus.

Profit: A firm's profit is the difference between its total revenue (TR) and total costs (TC). If total revenue exceeds total costs, the firm is making a profit. If total revenue is less than total costs, the firm is incurring a loss.

Profit Maximization: Firms aim to maximize their profit, and in the short run, this is achieved by producing at a level of output where marginal cost (MC) equals marginal revenue (MR). This is the point where the firm is neither making an additional profit nor incurring additional costs for the last unit produced. In other words, profit is maximized when each extra unit produced doesn't result in either extra profit or extra loss.

Firms may also consider profit maximization in the long run, but it's important to note that other objectives, such as growth, utility maximization, or social responsibility, can influence a firm's behavior and decision-making beyond pure profit maximization.

Profit Maximization Reasons:

1. Greater Wages and Dividends: Profit maximization can lead to higher wages for employees and greater dividends for entrepreneurs or shareholders. When a firm generates more profit, it can distribute a portion of those earnings to its stakeholders.
2. Retained Profits as a Cheap Source of Finance: Retained profits are the earnings that a firm keeps within the company rather than distributing them. This serves as a source of internal finance for the firm's growth and investment opportunities. It saves the firm from paying high interest rates on external loans or financing.
3. Short-Run Focus: In the short run, the primary focus for owners or shareholders is to maximize their financial gain from the company. Short-run profit maximization can lead to immediate benefits for these stakeholders.
4. Price Stability: Firms might choose to profit maximize in the long run because abrupt changes in prices can be disruptive and unsettling for consumers. By maintaining price stability, firms aim to provide a consistent and reliable output for their customers.

PED and Revenue Concepts:

• In markets where firms are price takers, they often face perfectly elastic demand. In this context, the average revenue (AR) curve is horizontal and coincides with the demand curve. This is because the price remains constant, and any change in quantity sold corresponds directly to a change in revenue.
• Average revenue (AR) is equivalent to marginal revenue (MR) in perfectly competitive markets. This means that both AR and MR are the same because a firm can sell an additional unit of its product at the same price.

Effect of Elasticity on Total Revenue:

• When demand is elastic (PED > 1), a price increase leads to a proportionally larger decrease in quantity demanded. The impact on total revenue depends on the degree of elasticity.
  • For instance, if a 10% price increase results in a 20% decrease in quantity demanded, the elasticity of demand is +2 (very elastic). In this case, total revenue decreases.
  • Conversely, if a 10% price increase results in only a 1% decrease in quantity demanded, the price elasticity of demand is +0.1 (relatively inelastic). Here, total revenue increases.

Average Revenue (AR) and Marginal Revenue (MR):

• In most cases, the average revenue (AR) curve is downward sloping. This means that as more units of a good are sold, the price per unit tends to decrease. This is a typical characteristic of demand curves.
• The marginal revenue (MR) curve is generally steeper than the AR curve. While this relationship between AR and MR exists, it does not need to be proven during the exam; it is a common feature of demand curves.

Understanding the interaction between price changes, elasticity, and total revenue is essential for businesses to make pricing decisions that optimize their financial outcomes.