Revenue and profit
| English | Chinese | Pinyin |
|---|---|---|
| profit | 利润 | lì rùn |
| marginal revenue | 边际收益 | biān jì shōu yì |
| total revenue | 总收益 | zǒng shōu yì |
| average revenue | 平均收益 | píng jūn shōu yì |
| normal profit | 正常利润 | zhèng cháng lì rùn |
| supernormal profit | 超常利润 | chāo cháng lì rùn |
| profit-maximising | 利润最大化 | lì rùn zuì dà huà |
Revenue isn't profit 利润
- A firm selling a million units can still go bust. What matters isn't how much money comes in, but how much is left after costs.
- Understanding revenue, then subtracting cost, gives profit — and the rule for maximising it.
A firm sells 30 units at a price of 5. What is total revenue (TR = P x Q)?
TR = 5 x 30 = 150.
Average revenue (TR divided by quantity) is the same as the ______.
AR = TR/Q = P.
Total, average and marginal revenue 边际收益
- Total revenue 总收益 (TR) = price × quantity.
- Average revenue 平均收益 (AR) = TR ÷ Q = the price.
- Marginal revenue (MR) = the revenue from one more unit.
For a price-maker, AR is the demand curve and MR lies below it; for a price-taker both are horizontal.
Worked example. Sell 30 units at a price of 5. TR = 5 × 30 = 150. If total cost is 100, profit = 150 − 100 = 50.
Revenue & profit
y = ax² + bx + c
Total revenue rises then falls as price changes.
Total revenue is 150 and total cost is 100. What is the profit?
Profit = TR - TC = 150 - 100 = 50.
Normal profit is the minimum needed to keep a firm in the industry.
It covers opportunity cost; anything above is supernormal profit.
Profit and its types
- Profit = total revenue − total cost.
- Normal profit 正常利润: just enough to keep the firm in the industry (covers opportunity cost).
- Supernormal (abnormal) profit: anything above normal.
A monopoly maximises profit at MC = MR and earns supernormal profit 超常利润
A firm maximises profit where:
MR = MC: before it each unit adds net profit, beyond it each unit loses money.
The profit-maximising 利润最大化 rule
- A firm maximises profit where marginal revenue = marginal cost (MR = MC).
- Before that point, an extra unit adds more revenue than cost (make it); beyond it, the reverse.
You've got it
- TR = P × Q; AR = price; MR = revenue from one more unit
- profit = TR − TC; normal profit keeps the firm in; supernormal is extra
- maximise profit where MR = MC