The Nature of Firms’ Revenues
- Whereas TC will rise with output, Total Revenue (TR) may not
- Whether TR rises or falls with output depends on the elasticity of the good
- g. a premiership football club could decreases prices of tickets for a game, and hence sell more tickets, but they wouldn’t make as much money if demand is inelastic.
- Marginal Revenue (MR) is the change in TR resulting from the sale of one more unit
- Average Revenue (AR) is the total revenue divided by the output sold.
Influences on Revenue
- The more market power has, the more any change in its output will influence the price
- Whether this change in price results in a rise in TR depends on the PED.
- AR and TR will increase if demand increases
- A firm that’s not perfectly competitive, and hence has some sort of market power (such as a monopoly or oligopoly), could seek to raise its revenue in the long term by driving out a competitor through predatory pricing
- This would likely cause a decrease in AR in the short-term, but once more market power is gained, they can increase their prices at a greater level than it was previously
- Changes in a consumer’s income can affect a leisure firm’s revenue
- Things like cinema and theatre were seen as a superior good, with an income elasticity of demand of around 1.75
- This means that the demand for such products varies greatly with a consumer’s income.
- Changes in the price of complementary goods also affect a firm’s revenue
- g. transport is a complement to leisure products, so an increase in public transport may affect the revenue for a cinema
- On the other hand, some products are substitutes, such as a new car being a substitute for a foreign holiday.
- So if the price decreases for one, demand will increase for that one, and hence demand would decrease for the other.
- Other factors may also influence demand, and hence revenue
- Bad weather in the UK may increase TV viewing, and increase foreign holidays, but may reduce attendance at some sports events.