Microeconomic Decision‑Makers: Influence of Sales on Revenue
Microeconomic Decision‑Makers – Firms’ Costs, Revenue and Objectives
Objective: Understand how changes in sales affect a firm’s revenue
Revenue is the total amount of money a firm receives from selling its output. It is directly linked to the volume of sales (quantity sold) and the price at which the output is sold.
Key Definitions
Total Revenue (TR): The overall income from sales.
\$TR = P \times Q\$
where P = price per unit, Q = quantity sold.
Average Revenue (AR): Revenue per unit of output.
\$AR = \frac{TR}{Q} = P\$
Marginal Revenue (MR): The additional revenue from selling one more unit.
\$MR = \frac{\Delta TR}{\Delta Q}\$
How Sales Influence Revenue
Changes in the quantity sold can affect revenue in three distinct ways, depending on the shape of the demand curve faced by the firm.
Price‑elastic demand (|ε| > 1): A rise in sales (higher Q) leads to a proportionally larger fall in price, causing total revenue to decrease. Conversely, a fall in sales raises price enough to increase total revenue.
Unit‑elastic demand (|ε| = 1): Changes in quantity sold are exactly offset by opposite changes in price, leaving total revenue unchanged.
Price‑inelastic demand (|ε| < 1): An increase in sales results in a relatively small drop in price, so total revenue increases. A decrease in sales reduces revenue.
Illustrative Numerical Example
Assume a firm sells a product at different price‑quantity combinations as shown below.
Price (P) per unit
Quantity (Q) sold
Total Revenue (TR)
$10
100
$1,000
$9
150
$1,350
$8
200
$1,600
$7
250
$1,750
$6
300
$1,800
From the table we can see:
When the price falls from \$10 to \$6, the quantity sold rises from 100 to 300 units.
Total revenue increases from \$1,000 to \$1,800, indicating that demand in this range is price‑inelastic.
If the price were to fall further and cause a proportionally larger increase in quantity, total revenue could start to fall, signalling a move into the price‑elastic region.
Graphical Representation
Suggested diagram: Plot a typical downward‑sloping demand curve, label the elastic, unit‑elastic and inelastic sections, and show how total revenue changes as the firm moves along the curve.
Key Points to Remember
Revenue depends on both price and quantity; a change in one affects the other.
The elasticity of demand determines whether a change in sales will raise, lower, or leave total revenue unchanged.
Firms use knowledge of revenue behaviour to decide on pricing strategies, output levels and market positioning.
Practice Question
A firm sells 500 units of a product at \$12 each, generating \$6,000 in total revenue. If the firm reduces the price to $10 and sales increase to 650 units, calculate the new total revenue and state whether revenue has increased or decreased. Explain which part of the demand curve the firm is likely operating on.