Revenue
Total Revenue = Quantity Sold x Average Selling Price
Generally if it reduces its selling price you expect to sell more
A rise in price usually leads to a fall in quantity sold
Average revenue = Total revenue / output
Marginal revenue = the amount each unit adds to total revenue
Revenue Curves
Marginal revenue slopes downwards – as more is produced the increase in revenue gets smaller
Because marginal revenue declines as production increases average revenue per unit also declines with increased production
Profit
Profit is the payment for enterprise – the risks that are taken
Normal profit
- This is the amount of profit needed to keep all factors of production in their current use in the long run
- Normal profit is a minimum level that is needed for an entrepreneur to stay in that business
Supernormal / abnormal profit
- These are profits that exceed the normal amount
- Profits are maximised where there is the largest difference between MR and MC
Profits have a number of roles in an economy:
- Supernormal or rising profits attract new entrants to markets
- Retained profits provide finance for future investments
- Allocation of factors of production - scarce factors tend to be more expensive and will therefore be used where they are likely to be the most profitable
