Students should be able to: Illustrate and perform simple calculations using total revenue, average revenue and marginal revenue. Draw and interpret revenue curves Understand the relationships between total revenue, price elasticity of demand and marginal revenue

1. How can we calculate revenue of a firm?
Topic 3.3.3

2. How can we calculate revenue of a firm?
Topic 3.3.3
Students should be able to:
• Illustrate and perform simple calculations using total
revenue, average revenue and marginal revenue.
• Draw and interpret revenue curves
• Understand the relationships between total revenue,
price elasticity of demand and marginal revenue

3. Key Concepts - Revenues
Average revenue Revenue per unit or the demand curve
Marginal revenue
The change in total revenue from selling
one extra unit of output
Price-taking businesses
A price taker has to sell at the market
price – found in perfect competition
Revenue maximisation
Revenue maximization is an output when
marginal revenue = zero (MR=0)
Revenue synergies
The ability to sell more products and
services or raise prices after a business
merger e.g. marketing and selling
complementary products; cross-selling
into a new customer base and sharing
distribution channels.

4. Revenue
• Revenue is the income generated from the sale
of goods and services in a market
• Revenue is the money is coming into the firm –
also known as turnover, or the value of sales
– Average Revenue (AR) = price per unit = total
revenue / output
• The AR curve is the same as the demand curve
– Marginal Revenue (MR) = the change in revenue
from selling one extra unit of output
• Total Revenue (TR) = Price per unit x Quantity

5. Average Revenue from UK Mobile Users
15.33
16.16 16.33 16.14 15.93
15.38 15.5 15.72
15.26
0
2
4
6
8
10
12
14
16
18
Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014
AveragerevenueinGBPpermonth
Average monthly retail revenue per subscriber in the United Kingdom

6. Revenue Calculations: A Falling AR Curve
Price per unit
(Average
Revenue)
Demand (units)
Total Revenue
(AR x Quantity)
Marginal
Revenue
£20 200 £4000
£18 250 £4500 £10
£16 300 £4800 £6
£14 350 £4900 £2
£12 400 £4800 -£2
£10 450 £4500 -£6
£8 500 £4000 -£10

7. Revenue Calculations: A Falling AR Curve
Price
Output
MR
AR
P1
P2
Q1 Q2
A fall in price per unit from P1 to
P2 leads to an increase in total
revenue. Demand is price elastic
for this price reduction. Marginal
revenue is positive.

8. Revenue Calculations: A Falling AR Curve
Price
Output
MR
AR
P1
P2
Q1 Q2
A fall in price per unit from P3 to
P4 leads to a fall in total revenue.
Marginal revenue has become
negative. The business has gone
beyond the point of max revenue.
P3
P4
Q3 Q4

9. Objective: Revenue Maximisation

10. Maximum Total Revenue: MR = Zero
Price
Output
MR
AR
Revenue Max: MR=0
Total revenue is maximised when
marginal revenue = zero
This is at the mid-point of the
demand (AR) curve for a business
with a downward-sloping ARP1

11. Maximum Revenue
• Maximum total revenue occurs where marginal
revenue is zero: i.e. no more added revenue can
be achieved from producing and then selling an
extra unit of output
• The point where MR=zero is directly underneath
the mid-point of a linear demand curve
• When marginal revenue is zero, the price
elasticity of demand = 1
• When marginal revenue is zero, if prices were
cut total revenue would fall, and if prices were
raised total revenue would fall

12. MC
Price
and
Cost
Output
AC
MR
AR
Revenue Max: MR=0
P1
C1
Maximum Revenue and Profit

13. MC
Price
and
Cost
Output
AC
MR
AR
Revenue Max: MR=0
P1
C1
Maximum Revenue and Profit
Total Profit
Choosing a price that maximises total revenue involves sacrificing some profit

14. 100 largest companies in the world ranked by revenue in 2014 ($
476.86
476.29
468
400.67
390.25
373
270.61
245.91
235.87
234.1
216.57
211.77
171.6
170.91
168.2
0 100 200 300 400 500 600
Royal Dutch Shell
Wal-Mart Stores
Sinopec
BP
Exxon Mobil
PetroChina
Volkswagen
Glencore Xstrata
Total
Toyota Motor
Samsung Electronics
Chevron
Phillips 66
Apple
E On
Revenue in billion U.S. dollars
Largest Businesses by Revenue (2014)

15. Largest hotel companies in the world ranked by revenue in 2014 ($)
22.8
13.8
10.5
5.98
5.86
5.28
4.42
2.11
1.08
1.01
0.76
0 5 10 15 20 25
InterContinental Hotels Group (UK)
Marriott International (US)
Hilton Worldwide (US)
Starwood Hotels & Resorts (US)
Accor (France)
Wyndham Hotel Group (US)
Hyatt Hotels (US)
Shangri-La Asia (Hong Kong, China)
Home Inns (China)
The Rezidor Hotel Group (Belgium)
Choice Hotels International (US)
Revenue in billion U.S. dollars
Largest Hotel Chains by Revenue (2014)
Marriott International and Starwood Hotels announced a merger in the autumn of 2015

16. Google and Apple’s Revenue
37.5
42.9
65.2
108.2
156.5
170.9
182.8
21.8 23.7
29.3
37.9
50.18
59.83
66
0
20
40
60
80
100
120
140
160
180
200
2008 2009 2010 2011 2012 2013 2014
RevenueinbillionU.S.dollars
Apple Google
Growing Revenue for Google and Apple

17. Google and Apple’s RevenueRevenue By Segment for Facebook
0
2000
4000
6000
8000
10000
12000
14000
2009 2010 2011 2012 2013 2014
RevenueinmillionU.S.dollars
Advertising revenue Payments and other fees revenue

18. Google and Apple’s RevenueAncillary Revenues - Airlines
38.7%
33.7%
32.4%
28.5%
24.6%
21.8%
20.8%
20.7%
20%
19.5%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Spirit
Wizz Air
Allegiant
Jet2.com
Ryanair
TigerAir
Jetstar
Flybe
Air Asia X
Volaris
Ancillary revenue as a share of total
Many airlines generate
ancillary revenues besides the
ticket price – including
baggage fees, priority
boarding charges and
revenues from on-board sales

19. Google and Apple’s RevenueSeasonal Revenues
• Seasonality refers to fluctuations in
output and sales revenue related to
the seasonal of the year.
• For most products there will be
seasonal peaks and troughs in
production and/or sales
• Demand for slippers peaks in the run
up to Christmas
• Demand for plants at garden centres
is linked to the planting season
• There is high demand for decorating
materials before the Easter weekend
• High street retailers such as jewelry
companies may sell as much as 80-
90% of their products over Xmas
• Theatres take a high % of their
income during pantomime season
Easter
chocolate
Summer fruits
Winter clothing Ski season
products
Some examples of seasonal demand

20. Revenue Curves in Competitive Markets
• In a perfectly competitive market, total revenue
(TR) is a diagonal straight line passing through
the origin
• Market demand and supply determine the price
and each firm is a price taker
• Thus, average revenue is constant
• Thus, average revenue – marginal revenue at the
prevailing market price

21. Average, Marginal and Total Revenue
Price,
Cost
Output
Total
Revenue
Output
Market Supply and
Demand
Total Revenue
D
S
Price =
£3
Total
Revenue

22. TR when there is a rise in market price
Price,
Cost
Output
Total
Revenue
Output
Market Supply and
Demand
Total Revenue
D1
S
Price =
£3
TR1
D2
Price =
£4
TR2
A rise in market price leads to an increase in the gradient of the total revenue curve

23. TR when there is a fall in market price
Price,
Cost
Output
Total
Revenue
Output
Market Supply and
Demand
Total Revenue
D1
S
Price =
£3
TR1
D2
Price =
£4
TR2
Price =
£2
D3
TR3
A fall in market price leads to a reduction in the gradient of the total revenue curve

24. Google and Apple’s RevenuePrice Takers and Price Makers
Price
Output
Price
Output
AR = MR
AR
MR
Price takers accept the
ruling market price and
sell each unit at the
same price. AR=MR
Price makers have some
pricing power and will
face a downward
sloping AR curve
Price makers are found in imperfectly competitive markets such as Monopoly & Oligopoly

25. How can we calculate revenue of a firm?
Topic 3.3.3