Revenue

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Revenue

  1. 1. RevenueRevenue
  2. 2. Learning outcomes Understand what is meant by revenue Define and calculate total, average and marginal revenue Understand the determinants of revenue
  3. 3. What is revenue? Revenue is the receipt of money from the sale of a firm’s output of goods or services in a given time period. It is the money coming in to a firm.
  4. 4. What determines revenue? Revenue is determined by two things: -how much is sold -how much it is sold for Revenue = units sold x price per unit
  5. 5. Total revenue Simplistically, revenue will rise the more units are sold. Assume a car dealer sells new cars at £18,000 each. Draw a diagram to show how revenue increases with the amount of new cars sold per week
  6. 6. Total revenue 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 0 1 2 3 4 5 6 7 8 9 10 11 Sales per week Revenueperweek(£)
  7. 7. Average and marginal revenue Average revenue (AR) = The average receipts per unit sold Marginal revenue (MR) = Extra revenue from an extra unit of sales
  8. 8. Average and marginal revenue Sales Total revenue (£) Average revenue (£) Marginal revenue (£) 0 0 1 18,000 2 36,000 3 54,000 4 72,000 5 90,000 6 108,000 7 126,000 8 144,000 9 162,000 10 180,000 Calculate AR and MR and draw a diagram of AR and MR against sales
  9. 9. Average and marginal revenue 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 0 1 2 3 4 5 6 7 8 9 10 11 Sales Revenue(£) AR MR
  10. 10. Price, demand and revenue Often firms will have to cut prices to sell more output. Citroen is likely to sell more new cars by reducing prices. It does this by offering ‘cashbacks’. The inverse relationship between price and sales is known as the ‘law of demand’ – the lower the price the higher the demand
  11. 11. Average and marginal revenue Calculate TR and MR. Draw graphs, one underneath the other, of -TR against sales -AR and MR against sales Sales Average revenue (£) Total revenue (£000,000s) Marginal revenue 0 30,000 1,000 28,000 2,000 26,000 3,000 24,000 4,000 22,000 5,000 20,000 6,000 18,000 7,000 16,000 8,000 14,000 9,000 12,000 10,000 10,000 11,000 8,000 12,000 6,000 13,000 4,000 14,000 2,000
  12. 12. Average and marginal revenue Sales Average revenue (£) Total revenue (£000,000s) Marginal revenue 0 30,000 0 1,000 28,000 28 28,000 2,000 26,000 52 24,000 3,000 24,000 72 20,000 4,000 22,000 88 16,000 5,000 20,000 100 12,000 6,000 18,000 108 8,000 7,000 16,000 112 4,000 8,000 14,000 112 0 9,000 12,000 108 -4,000 10,000 10,000 100 -8,000 11,000 8,000 88 -12,000 12,000 6,000 72 -16,000 13,000 4,000 52 -20,000 14,000 2,000 28 -24,000 Check your calculations before you draw the diagrams. Plot marginal in between each sales point
  13. 13. Sales Sales Revenue Revenue TR ARMR Reducing price first raises revenue Eventually reducing price will reduce revenue Revenue is maximised where MR = 0

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