business revenue and turnover

Revenue is the income generated from the output produced by firms and then sold in goods markets. It is also known as sales turnover. The revenue the firm can create depends on the strength of demand for the products they are supplying - in other words how much output can be sold at a given price.

TOTAL REVENUE = Price per unit x Quantity sold ( TR = p x q)

AVERAGE REVENUE = PRICE = Total revenue divided by output - the average revenue curve for a business is the same as their demand curve.

MARGINAL REVENUE = the change in total revenue as a result of selling one extra unit of output. If the average revenue curve is downward sloping then marginal revenue will lie below AR. In fact MR cuts the x-axis at half the distance from the origin from where AR cuts the origin. You won't need to prove this for your a-levels. But is helps you to get the diagrams right every time!

TOTAL REVENUE is maximised when marginal revenue = zero

When the demand curve (AR) is perfectly elastic, AR = MR and total revenue will rise at a constant rate as price per unit increases. This is shown in the two diagrams on the left hand side shown in blue

Most firms face a downward sloping demand curve for their products. As AR falls, MR will fall as well (price has to be lowered to sell additional units). Total revenue will rise at a decreasing rate (see bottom right diagram) until marginal revenue is zero. At this point (MR=0), total revenue is maximised. 

The area shaded in yellow shows the maximum total area underneath the demand curve AR.

An outward shift in demand causes a rise in both the equilibrium market price and quantity traded - leading to an increase in total revenue for a business. The reverse effects occur in an economic recession when demand, prices and revenues often fall

MARGINAL AND AVERAGE REVENUE

The MR curve is always twice the slope of the AR curve. Total revenue is maximised when MR is zero and the elasticity of demand is equal to one.