Revenue maximisation is when a firm tries to get the highest possible total revenue, not the highest profit.
Total revenue (TR) = price (P) × quantity sold (Q).
Think of a lemonade stand: you want to sell as many cups as possible, even if each cup is cheap, because the total money you get from all cups is what matters.
Marginal Revenue is the extra revenue from selling one more unit.
For a firm that can set its own price, MR is usually less than the price because to sell more units it must lower the price for all units.
Analogy: If you lower the price of a single cup of lemonade, you also lower the price of every other cup you sell. The extra money you get from that one extra cup is MR.
| Quantity (Q) | Price (P) | Total Revenue (TR) | Marginal Revenue (MR) |
|---|---|---|---|
| 1 | $5 | $5 | – |
| 2 | $4 | $8 | $3 |
| 3 | $3 | $9 | $1 |
| 4 | $2 | $8 | –$1 |
The firm maximises revenue where MR = 0 (or where MR changes sign from positive to negative). In the table, that happens between Q = 3 and Q = 4.
PED tells us how much quantity demanded changes when price changes.
Formula: \$PED = \frac{\% \Delta Q}{\% \Delta P}\$
When |PED| > 1, demand is elastic; when |PED| < 1, demand is inelastic.
Why does it matter for revenue?
If demand is elastic, lowering the price increases total revenue because the percentage increase in quantity sold outweighs the price drop.
If demand is inelastic, lowering the price actually reduces total revenue.
Example: A smartphone brand finds that a 10% price cut leads to a 20% increase in sales. Demand is elastic, so the brand can raise revenue by cutting prices.
💡 Tip: Practice drawing a demand curve and shading the area under the curve to visualise TR.