Class revenue analysis

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Class revenue analysis

  1. 1. Cost and Revenue Analysis
  2. 3. Economies of scope <ul><li>Economies of scope occur when products share common inputs and diversification leads to cost savings. </li></ul><ul><li>The operation of bus services, terms operating a single bus on a single route may not be disadvantaged in terms of operating costs. However, a bus company operating a network of routes may be able to reduce its unit costs by attracting a higher number of passengers through operating connecting services and through ticketing. Network operation may also allow lower unit costs for marketing and providing timetable information. </li></ul>
  3. 4. Measuring Economies of Scope <ul><li>For a firm producing three products, the scope index S can be measured as </li></ul><ul><li>S= [ c 1 + c2 + c3 + c(1+2+3) ] =(C1 + C2 + C3) </li></ul><ul><li>If S is positive, three products an be manufactured together </li></ul>
  4. 6. Revenue <ul><li>Defining total, average and marginal revenue </li></ul><ul><ul><li>TR = P × Q </li></ul></ul><ul><ul><li>AR = TR / Q </li></ul></ul><ul><ul><li>MR =  TR /  Q </li></ul></ul><ul><li>Revenue curves when firms are price takers (horizontal demand curve) </li></ul><ul><ul><li>average revenue ( AR ) </li></ul></ul><ul><ul><li>marginal revenue ( MR ) </li></ul></ul><ul><ul><li>total revenue ( TR ) </li></ul></ul>
  5. 7. Deriving a firm’s AR and MR: price-taking firm O O Price (£) AR, MR (£) P e S D D = AR = MR Q (millions) Q (hundreds) (a) The market (b) The firm
  6. 8. Total revenue for a price-taking firm TR TR (£) Quantity Quantity (units) 0 200 400 600 800 1000 1200 Price = AR = MR (£) 5 5 5 5 5 5 5 TR (£) 0 1000 2000 3000 4000 5000 6000
  7. 9. Revenue <ul><li>Revenue curves when price varies with output (downward-sloping demand curve) </li></ul><ul><ul><li>average revenue ( AR ) </li></ul></ul><ul><ul><li>marginal revenue ( MR ) </li></ul></ul>
  8. 10. AR and MR curves for a firm facing a downward-sloping demand curve Q (units) 1 2 3 4 5 6 7 P =AR (£) 8 7 6 5 4 3 2 TR (£) 8 14 18 20 20 18 14 MR (£) 6 4 2 0 -2 -4 MR AR, MR (£) Quantity AR
  9. 11. Revenue <ul><li>Revenue curves when price varies with output (downward-sloping demand curve) </li></ul><ul><ul><li>average revenue ( AR ) </li></ul></ul><ul><ul><li>marginal revenue ( MR ) </li></ul></ul><ul><ul><li>total revenue ( TR ) </li></ul></ul>
  10. 12. TR curve for a firm facing a downward-sloping D curve TR Quantity TR (£) Quantity (units) 1 2 3 4 5 6 7 P = AR (£) 8 7 6 5 4 3 2 TR (£) 8 14 18 20 20 18 14
  11. 13. Revenue <ul><li>Revenue curves when price varies with output (downward-sloping demand curve) </li></ul><ul><ul><li>average revenue ( AR ) </li></ul></ul><ul><ul><li>marginal revenue ( MR ) </li></ul></ul><ul><ul><li>total revenue ( TR ) </li></ul></ul><ul><ul><li>revenue curves and price elasticity of demand </li></ul></ul>
  12. 14. AR and MR curves for a firm facing a downward-sloping demand curve AR, MR (£) Quantity MR AR Elasticity = -1 Elastic Inelastic
  13. 15. TR curve for a firm facing a downward-sloping D curve TR Elastic Inelastic Quantity TR (£) Elasticity = -1
  14. 16. Profit Maximisation <ul><li>Using total curves </li></ul><ul><ul><li>maximising the difference between TR and TC </li></ul></ul>
  15. 17. Finding maximum profit using total curves TR, TC, T  (£) TR TC Quantity
  16. 18. Profit Maximisation <ul><li>Using total curves </li></ul><ul><ul><li>maximising the difference between TR and TC </li></ul></ul><ul><ul><li>the total profit curve </li></ul></ul>
  17. 19. Finding maximum profit using total curves TR, TC, T  (£) T  TR TC a b c d Quantity
  18. 20. Finding maximum profit using total curves TR, TC, T  (£) T  TR TC Quantity d e f
  19. 21. Profit Maximisation <ul><li>Using total curves </li></ul><ul><ul><li>maximising the difference between TR and TC </li></ul></ul><ul><ul><li>the total profit curve </li></ul></ul><ul><li>Using marginal and average curves </li></ul><ul><ul><li>stage 1: profit maximised where MR = MC </li></ul></ul>
  20. 22. Finding the profit-maximising output using marginal curves Quantity Costs and revenue (£) MR MC e Profit-maximising output
  21. 23. Profit Maximisation <ul><li>Using total curves </li></ul><ul><ul><li>maximising the difference between TR and TC </li></ul></ul><ul><ul><li>the total profit curve </li></ul></ul><ul><li>Using marginal and average curves </li></ul><ul><ul><li>stage 1: profit maximised where MR = MC </li></ul></ul><ul><ul><li>stage 2: using AR and AC curves to measure maximum profit </li></ul></ul>
  22. 24. Measuring the maximum profit using average curves T O T A L P R O F I T MR Quantity Costs and revenue (£) MC AC AR Total profit = £1.50 x 3 = £4.50 6.00 4.50 b a
  23. 25. Profit Maximisation <ul><li>What if a loss is made? </li></ul><ul><ul><li>loss minimising: still produce where MR = MC </li></ul></ul>
  24. 26. Loss-minimising output O Costs and revenue (£) Quantity LOSS MC AC AR MR Q AC AR
  25. 27. Profit Maximisation <ul><li>What if a loss is made? </li></ul><ul><ul><li>loss minimising: still produce where MR = MC </li></ul></ul><ul><ul><li>short-run shut-down point: P = AVC </li></ul></ul>
  26. 28. The short-run shut-down point O Costs and revenue (£) Quantity AR AVC AC P = AVC Q
  27. 29. Profit Maximisation <ul><li>What if a loss is made? </li></ul><ul><ul><li>loss minimising: still produce where MR = MC </li></ul></ul><ul><ul><li>short-run shut-down point: P = AVC </li></ul></ul><ul><ul><li>long-run shut-down point: P = LRAC </li></ul></ul>

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