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Questions and Answers
What does total revenue represent for a business?
What does total revenue represent for a business?
How is marginal revenue calculated?
How is marginal revenue calculated?
What happens to total revenue if price increases and demand is elastic?
What happens to total revenue if price increases and demand is elastic?
What is the definition of profit in economic terms?
What is the definition of profit in economic terms?
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What does average revenue equal when a firm sells all output at the same price?
What does average revenue equal when a firm sells all output at the same price?
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What does it indicate when the MR curve is twice as steep as the AR line?
What does it indicate when the MR curve is twice as steep as the AR line?
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At what quantity does the MR line cut the x-axis?
At what quantity does the MR line cut the x-axis?
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What is normal profit in the context of economics?
What is normal profit in the context of economics?
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Which type of profit is reported in a firm's accounts?
Which type of profit is reported in a firm's accounts?
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Which situation corresponds to a business operating at normal profit?
Which situation corresponds to a business operating at normal profit?
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Study Notes
Revenue
- Total Revenue (TR): The total income from selling goods/services, calculated as price multiplied by output.
- Average Revenue (AR): The revenue per unit sold, computed as total revenue divided by output. Equal to price when all output is sold at the same price.
- Marginal Revenue (MR): Additional revenue from selling one more unit, equivalent to the price of the last unit sold.
- Impact of Price Increase on Total Revenue: If demand is elastic and price increases, total revenue will decrease.
Profit/Loss
- Profit/Loss Definition: The difference between total revenue and total costs. Calculated as total revenue minus total costs.
- Opportunity Cost: Economists consider this a cost in business calculations, representing the value of the next best alternative that is sacrificed.
- Example: If an entrepreneur invests rather than saving, the interest lost represents an opportunity cost included in total business costs.
Relationship Between Sales & Revenue
- Demand curves illustrate quantities sold at various prices, with total revenue calculated by multiplying quantity sold by price.
- Change in revenue is used to determine marginal revenue, showing how it varies with different output levels.
- In a demand curve, the MR curve is twice as steep as the AR line; both curves share the same y-axis intercept.
- The MR curve intersects the x-axis at the quantity of 60, indicating the maximum total revenue point.
Measures of Profit
- Accounting Profit: The profit remaining after deducting total costs, excluding opportunity costs. This is the profit reported in financial accounts.
- Normal Profit: The minimum level of profit required to cover total costs including opportunity costs; necessary to keep a firm operating in a market.
- Supernormal Profit: Any profit exceeding normal profit; not an expectation in competitive markets but indicates higher than average returns.
- A firm aims to operate where total revenue equals total costs to achieve normal profit.
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