Welcome back! In the last blog, we analysis the relationship between income &substitutional effect and the demand of products. Moreover, we illustrate how to analysis the income effect and substitutional effect through graph. In today’s blog we will firstly introduce the cost, revenue, profit, and shout-run& long-run production function.

There are few concept that we need to be familiar with.

Firstly, Revenue. The revenue of a firm means receipts of money from the sale of goods and services over a given time period. Some people also refer to the revenue as turnover.

Secondly. Total revenue (TR), which is calculated by multiplying the quantity sold by the price at which the goods were sold, TR = Price × Quantity.

Thirdly, Average revenue (AR), which is the amount of money received, on average for each good sold. AR = TR/Quantity = Price.

The last one, Marginal revenue (MR), which is the revenue received from selling one more unit of output. It is the extra revenue at the margin (i.e. by selling marginal unit of output).

This graph below successfully summarize the relationship between total revenue, average revenue, and margins revenue.

In the top diagram, the downward sloping demand curve is average revenue and marginal revenue curve, which is falling twice as fast as average revenue curve. When marginal revenue falls, the extra revenue gained from the sale of the last unit is falling with every unit sold, but it is still positive. This is why the total revenue curve keeps rising,  but at a declining rate (decreasing slop).

The total revenue curve is at a maximum when the marginal revenue curve cuts the x-axis (MR = 0). The last unit sold added no revenue to the total, so the total revenue curve remains unchanged (it is momentarily flat). As successive marginal revenues are negative, the total does finally fall.

If the demand curve is perfectly elastic, the situation will be like this:

The perfectly elastic average revenue curve is flat, because any change in price will lead to zero in quantity, The marginal revenue must be the same value as the average revenue. So the two curves are the same.

As marginal revenue is constant, the extra revenue added to the total every time a unit is sold is the same for every unit. Hence, total revenue is continually rising and at a constant rate.

That’s all for today’s blog, In the next blog, we all talk about different cost curve.