Revenue is the total money a firm gets from selling its goods or services. It is calculated by multiplying the price per unit by the number of units sold.
Formula: \$R = P \times Q\$
Imagine you run a lemonade stand. If you sell each cup for £1 and you sell 30 cups, your revenue is £30. 🎉
| Type | Formula |
|---|---|
| Total Revenue (TR) | \$TR = P \times Q\$ |
| Average Revenue (AR) | \$AR = \frac{TR}{Q} = P\$ |
| Marginal Revenue (MR) | \$MR = \frac{ΔTR}{ΔQ}\$ |
In the short run, firms can change output by hiring more workers or using existing equipment more intensively, but they cannot change the size of their factory. Revenue will rise as long as price stays above marginal cost, but it may eventually fall if the market price drops.
In the long run, firms can adjust all inputs, including plant size. If the market price is below average cost, firms may exit the industry, reducing supply and potentially raising the price. Revenue depends on both the price and the quantity the firm can produce efficiently.
Think of a bakery that can bake more cakes by hiring extra bakers (short run) but can also build a new oven to bake even more cakes in the future (long run). 🍰
Key Formula: \$R = P \times Q\$ – remember this when asked to calculate revenue.
Common Question Types:
Tip: Use the “price × quantity” rule for quick calculations. If the question asks for marginal revenue, think about the change in revenue when one more unit is sold.
Think of revenue like a pizza shop. The price (£) is how much each pizza costs, and the quantity (Q) is how many pizzas you sell. The more pizzas you sell, the higher your revenue – but only if you can keep the price steady. If you raise the price, you might sell fewer pizzas, so your revenue could drop. Balancing price and quantity is like finding the perfect pizza topping mix that keeps customers happy and the shop profitable. 🍕