03 Business Revenue

7/31/2019 03 Business Revenue

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0011 0010 1010 1101 0001 0100 1011Economics – Unit 3

Business revenues



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Syllabus requirements

• Illustrate and perform simple calculations using

total revenue, average revenue and marginal

revenue.

• Students will need to be able to draw and interpret

revenue curves and to understand the relationships

between total revenue, price elasticity of demand

and marginal revenue.



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How does each of the following earn

their revenues?• Market trader• Amazon

• Channel Tunnel

• Restaurant• Thorpe park

• Farmer

• Royal Mail• Google



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Revenues from the Channel Tunnel



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Revenues from a local market trader



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Revenues by Amazon.com

http://uk.wrs.yahoo.com/_ylt=ArGQujJ.H843Ugh1pTKZIWlNBQx.;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1e5u1i40a/**http%3A//uk.images.search.yahoo.com/search/images/view%3Fback=http%253A%252F%252Fuk.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253Damazon%252Blogo%2526ei%253DUTF-8%2526fr%253Dyfp-t-501%2526x%253Dwrt%26w=450%26h=200%26imgurl=38one.com%252Flogos%252Famazon.jpg%26rurl=http%253A%252F%252Fwww.38one.com%252Fcleverblog%252Famazoncom%26size=8.3kB%26name=amazon.jpg%26p=amazon%2Blogo%26type=jpeg%26no=1%26tt=14,931%26oid=dbef001bf9ff4fae%26ei=UTF-8



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Revenues from a restaurateur



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Revenues from a theme park eg

Thorpe Park



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Revenues from for a ‘typical

farmer’!



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Revenues from Royal Mail



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Revenues from Google



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Revenues for a football club



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Revenues for a football club

Going down….

Going up!

Going down….



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What is Revenue?• Revenue = money that comes in to the business

from the sale of goods and services over a period of

time.



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Google revenue• Google has over sixty per cent of internet searches - it dwarfs the competition

and will continue to do so for the time being - and its stable-mate You Tube isestimated to carry 40% of all videos watched online worldwide. Annually YouTube is estimated to serve up 75 billion video streams to 375 million uniquevisitors.

• Digital popularity does not equal monopoly profits!

• Google’s challenge is to create a sustainable revenue model from the You Tubeinvestment.

• The business model is heavily focused on driving advertising revenues fromhome page ads, in-video overlay ads, banner ads, sponsored videos andsponsored links.

• But You Tube is an expensive business to operate - the costs of running the site

including bandwidth, content acquisition and licensing and other costsamount to over $700m a year.

• “Credit Suisse estimate YouTube’s total running costs will be between $500m and $1bn this year, while revenues will only be in the region of $240m.

• Even with the addition of more professionally created content, the economicsappear unsustainable.”

http://news.bbc.co.uk/1/hi/business/8003636.stm



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Total Revenue… • Total revenue = income generated from sales (price

* quantity sold)

• TR = P * Qty

• How can you see this on a D curve????

• Draw a simple D curve – select Qty output and dot on

price sold … so TR is equal to the ‘square’ of

shading



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Demand curve…

Price

Output

Demand

P1

Q1



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Total revenue = P x Qty…

Price

Output

Demand

P1

Q1



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Revenue concepts

• Revenue (or turnover) is the income generated from thesale of output in product markets.

• There are two main revenue concepts to grasp at this stage:

– Average Revenue (AR) = Price per unit = total revenueoutput

– Marginal Revenue (MR) = the change in revenue fromselling one extra unit of output

• Total revenue (TR) = price per unit x output



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Total revenue – constant price…

• This shows TR when priceis constant.

• What will the TR curve look like?

• What will the AVERAGE

REVENUE curve look like?

• What will the MARGINALREVENUE curve look like?

output TR

0 0

1 5

2 10

3 15

4 20

5 25

6 30

7 35

8 40

9 45

10 50



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How can a business increase sales?

• Its not always the case that a company will

only use one PRICE for their customers.

• Many companies use a range of prices to

increase their sales…. Such as???

• Price is not always constant!



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Price discriminating companies…

Sometimes toincreasesales, acompanymight reduceprice at‘certaintimes’.



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Calculating AR & MR

output AR TR MR

1 30

2 54

3 72 4 84

5 90

6 90

7 84 8 72

9 54

10 30



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Calculating AR & MR

output AR TR MR

1 30 30

2 27 54 24 3 24 72 18

4 21 84 12

5 18 90 6

6 15 90 0 7 12 84 -6

8 9 72 -12

9 6 54 -18

10 3 30 -24

Why is this also the‘price’?

What would

this look like as

a line diagram?

What would you

recommend as

their max sales

qty?

`



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-40

-20

0

20

40

60

80

100

1 2 3 4 5 6 7 8 9 10

AR

TR

MR

Optimum sales…



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Average Revenue…

• How do you calculate average revenue?

• AR = TR = or = (P * Q)

Q Q

• so AR =P

• So AR = D curve!!!!



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Average Revenue

Revenue

Output

Average

revenue

P1

P2

Q1 Q2

What happens ifPrices arelowered?



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Average Revenue

Revenue

Output

Average

revenue

P1

P2

Q1 Q2

Lost revenue

from lower price

Increased

revenuefrom selling

more

How does abusiness decideon the ‘optimum’price to charge?



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Marginal & Average Revenue

Revenue

Output

Average

revenue

P1

P2

Q1 Q2

Marginal

revenue

It dependson the

‘marginal’

revenue



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Maximising Total RevenueRevenue

Output

AR

MR

P1

Q1

Total revenue maximised when MR = zero



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0011 0010 1010 1101 0001 0100 1011Your go…. A numerical example..



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Fill

inthe

gaps

…

price per unit

SALES AR

(TR/quantity) TR MR

1 20

2 36

3 48

4 565 60

6 60

7 56

8 48

9 36

10 20



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The answers..

Why would

you not want anegative MR?

Why accept a

0 MR rather than a MR of

4?

price per unit

SALES

AR

(TR/quantity

) TR MR

1 20 20

2 18 36 16

3 16 48 12

4 14 56 8

5 12 60 4

6 10 60 0

7 8 56 -4

8 6 48 -8

9 4 36 -12

10 2 20 -16

Which is better 5

sales with 60 TR

or 6 sales with

60 TR?



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The diagram…

-20

-10

0

10

20

30

40

50

60

70

1 2 3 4 5 6 7 8 9 10

AR

TR

MR

Total revenue maximised when MR = zero

Once MR isnegative…TRstarts to fall!



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A Shift in Revenue Curves

Revenue

Output

AR1

MR1

AR2

MR2

A shift in the demandcurve for a business(i.e. an outward shift ofAR) will also cause anoutward shift of MR

The reverse is true foran inward shift indemand. I.e. revenueswill tend to fall if there

is an industry widerecession affecting thedemand of a business



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Importance of revenues

• Revenues affect the profitability of a business

• When demand is price inelastic, a fall in price

causes a fall in TR (marginal revenue will benegative)

• The elasticity of demand (AR) has an effect on the

profit margins of businesses in competitive and

concentrated markets

• When demand is perfectly elastic, then the AR and

the MR curves are the same



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HWK

• Finchfield Cycles

• Andertain p 303

• Complete Q 1a, b, c & Q2

03 Business Revenue

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