 ## DragIT - Revenue curves (2)

A change in the firm's output represents a movement along the demand curve (AR) and a movement along the TR curve. A shift in the demand curve would cause the total revenue curve to shift too.

The diagram below shows the current demand curve and marginal revenue curve (AR1and MR1 respectively) for product Z. Demand for this product falls by two units at all prices.

(a) Click on the points where the demand curve crosses the two axes in order to construct the new demand curve.

(b) Now click on the two points where the MR curve crosses the two axes in order to construct the new MR curve. 1

##### Revenue curves

What is the new price charged by the firm to generate maximum revenue? (For the AR2 and MR2 curves)

The maximum revenue will, following the shift of the AR and MR curves, be at a price of £12. The marginal revenue curve should be twice the slope of the demand curve. The demand curve now crosses the axis at 12 units and so the new MR curve should cross the axis at 6 units of output. This is the point where total revenue is at a maximum (any increase in output will mean negative marginal revenue and therefore a reduction in total revenue). At this level of output, the demand curve shows that the firm is charging a price of £12. 2

##### Revenue curves

What will be the value of the total revenue received by the firm following the shift of the demand curve to AR2 if they choose to maximise revenue?

Yes, that's correct. Well done. To maximise revenue the firm will sell 7 units at a price of £12 each. This will give them a total revenue of £72.No, that's not right. To maximise revenue the firm will sell 6 units at a price of £12 each. This will give them a total revenue of £72.Your answer has been saved. 