Revenues

Revenue – the income generated from the sale of goods and services in a market

Average Revenue – revenue per unit or the demand curve

Marginal Revenue – the change in total revenue from selling one extra unit of output

Price-Taking Businesses – a price taker has to sell at market price – found in perfect competition

Revenue Maximisation – revenue maximisation is an output when marginal revenue = zero (MR=0)
– make as much money as possible (not profit!)

Total Revenue (TR) = Price x Quantity

Goals of a Firm

Profit Maximising – when profit (total revenue - total costs) is the highest – when MC=MR

Revenue Maximising – when revenue is the maximum – when MR=0

Sales Maximising – when quantity sold is the highest – when AC=AR

Allocative Efficiency – when P=MC

Productive Efficiency – lowest point on AC curve

Revenues Continued

A fall in price per unit from P1 to P2 leads to an increase in total revenue, demand is price elastic for
this price reduction, marginal revenue is positive.

A fall in price per unit from P3 to P4 leads to a fall in total revenue, marginal revenue has become
negative as the business has gone past the point of revenue maximisation.

Total revenue is maximised when marginal revenue = zero. This is at the mid-point of the demand
(AR) curve for a business with a downward-sloping AR.

Maximum Revenue and Profit

MR is always lower than AR

Normal Profit – neither profit or a loss/breakeven

Supernormal Profit – profit

Subnormal Profit – loss

Seasonal Revenues

Seasonality refers to fluctuations in output and sales revenue related to the seasonal of the year.

For most products, there will be seasonal peaks and troughs in production and/or sales.

Revenue Curves in Competitive Markets

In a perfectly competitive market, TR is a diagonally straight line passing through the origin. Market
demand and supply determine the price and each firm is a price taker. Thus, average revenue is
constant. Thus average revenue = marginal revenue at the prevailing market price.
Rise in the Market Price – If demand rises, the TR gradient increases

Fall in the Market Price – if demand falls, the TR gradient reduces

Price Takers accept the ruling market price and sell each unit at the same price. AR=MR.

Price makers have some pricing power and will face a downward sloping AR curve.

Profit

Different Business Objectives

Profit Maximisation

Sales Revenue Maximisation

Business Growth/Market Power

Business Survival (in a recession)

Not for Profit Social Enterprises

State-Owned Businesses

Growth for Businesses

Organic Growth – grown through investment from profit

Inorganic Growth – grown through mergers

Business Objectives

Satisficing behaviour – satisficing involves the owners of a business setting minimum acceptable
levels of achievement in terms of revenue and profitability

Social Enterprises – business with profits reinvested for social aims – profit, people and planet

Other Examples: Share Price, Market Power, Social Aims, Reputation, Cash Flow, Managerial Aims

Reasons for Different Objectives

Managerial objectives/managerial utility – revenue or sales growth instead of profit maximisation,

achieve satisfactory profit/return to shareholders

Information constraints – lack of accurate information on marginal cost & revenue, cost-plus pricing
(AC + Variable Profit) is a common tactic

Small Businesses/start-up – different aims – many small firms are ‘life-style businesses’ for owners

State owned Corporations – don’t aim for profit but aim to achieve their goals

Maximisers and Satisficers

Maximisers behave in a traditional economic way and always try to make the best possible choice
from the available alternatives.

Satisficers examine only a limited set of alternatives and choose the best between them.

 Many businesses who adopt satisficing use of rule of thumb instead of complex pricing
policies
  Instead of seeking the optimum profit-maximising price and output, they rely on simple cost-
plus approaches
 Satisficers may be the managers of a business who are more concerned with increasing
revenue and/or market share rather than pure profit maximisation

Sales Revenue Maximisation

Aims to maximise sales revenue rather than profits because it wishes to deter the profitable entry of
new firms/rivals into an industry

Sales Max is at an output where AR=AC. At this output, normal profits are made.

Business Objectives/Goals: Counterargument to profit maximising

Most are profit-seeking but not profit maximisers

Satisficing is probably the most common approach that businesses take across markets

Businesses learn from experience and get a feel for changing market conditions

Actual and potential threats from commercial rivals is vitally important in the behaviour of business
in contestable, imperfect markets.

Increasingly firms are giving greater emphasis to social value as well as narrow measures of
shareholder return

Objectives and Pricing overview

Principal Agent Problem – difference between managerial motives and shareholder motives

Interdependent behaviour in an oligopoly

Regulatory interventions matter

More firms use ‘big data’ to drive revenues

Consumers are sensitive to fair/ethical pricing