Short-Run Supply
"Revenue is the amount of money a company receives in exchange for its goods and services or conversely, what a customer pays a company for its goods or services. The revenue received by a company is usually listed on the first line of the income statement as revenue, sales, net sales, or net revenue." Investopedia.com
The bottom line is net income. How is a company functioning? Is it well? How are the earnings?
Revenue analysis determines how well marketing strategies are working. Revenue calculations demonstrate price changes affecting the demand for the product, and a multitude of other insights.
Determine the consumers' product demand. Determine the production costs.
Profits are total revenues minus total costs.
Objective:
Calculate the amount of output to supply in order to maximize profits.
Based on a perfectly competitive market:
Total Revenue (TR)-
P x Q
Ex. If P = $10, and Q = 2, then
Total Revenue = P x Q
Total Revenue = $10 x 2
Total Revenue = $20
Marginal Revenue (MR)-
TR changes in response to a 1-unit change in the firm's output. Perfectly competitive market. Increase output by 1 unit, it
increases TR by P × 1 = P
MR is equal to the market price, P.
Short‐run profit maximization:
-maximize profits (marginal revenue equals its marginal cost)
-marginal revenue exceeds marginal cost (greater profits by increasing output)
-marginal revenue is below marginal cost (losing money, must reduce output)
Ex. What is the result of a product price increase on the elastic portion of a demand curve?
-An increase in total revenue.
-A decrease in quantity demanded.
-Movement toward a portion of the demand curve that is more elastic.
On the elastic portion of the demand curve an increase in price will increase total revenue. The price effect is greater than the quantity effect. Quantity will still decrease.
Calculating revenue is easy. Revenue analysis is extremely valuable. Accountants manipulate the numbers according to statement comprehension.
Objective:
Calculate the amount of output to supply in order to maximize profits.
Based on a perfectly competitive market:
Total Revenue (TR)-
P x Q
Ex. If P = $10, and Q = 2, then
Total Revenue = P x Q
Total Revenue = $10 x 2
Total Revenue = $20
Marginal Revenue (MR)-
TR changes in response to a 1-unit change in the firm's output. Perfectly competitive market. Increase output by 1 unit, it
increases TR by P × 1 = P
MR is equal to the market price, P.
Short‐run profit maximization:
-maximize profits (marginal revenue equals its marginal cost)
-marginal revenue exceeds marginal cost (greater profits by increasing output)
-marginal revenue is below marginal cost (losing money, must reduce output)
Ex. What is the result of a product price increase on the elastic portion of a demand curve?
-An increase in total revenue.
-A decrease in quantity demanded.
-Movement toward a portion of the demand curve that is more elastic.
On the elastic portion of the demand curve an increase in price will increase total revenue. The price effect is greater than the quantity effect. Quantity will still decrease.
Calculating revenue is easy. Revenue analysis is extremely valuable. Accountants manipulate the numbers according to statement comprehension.
