Production of Goods and Services

Hello learner and welcome to Section 4. This section introduces the concepts of production, cost, and revenue. You will explore time or periods in production, investigate Total Product, Marginal Product Average Product, use graphs to show their relationship and understand how resources like labour and capital contribute to the output of a firm. You will examine how to apply the concept of cost to calculate Total, Average, and Marginal Costs. This will help you to understand how firms manage expenses and work to minimise costs while keeping productivity. Finally, you will investigate how businesses generate income by calculating Total, Average, and Marginal Revenues, and sketch revenue curves to visually represent the relationship between output and earnings.

KEY IDEAS

• Every production process has cost elements and these costs can be expressed as Total Cost, Average Cost, and Marginal Cost. Total cost refers to the sum of all costs paid by firm in the production of goods or services. Average Cost and Marginal Cost are calculated using Total Cost.

• The concepts of production, cost, and revenue can be visualised using curves and other infographics.

• The two methods of production are Capital-intensive and Labour-intensive.

• Time or periods in production are classified into short-run (where at least one factor of production is fixed) and Long-run (where all factors are variable).

• Total Product refers to the total output produced by a firm or individual during a specific period using a given quantity of inputs. Marginal Product and Average Product are both calculated using Total Product.

• Total Revenue is the income generated from selling goods or services over a defined period of time, one month for example. Marginal Revenue and Average Revenue are both calculated using Total Revenue.

Have you ever visited a carpentry shop or any shop where tables, chairs and other furniture are produced in your community? How long has that shop (firm) been producing the furniture? What inputs or tools do they use?

In Economics, the production of goods takes place over different lengths of time. These different lengths of time are known as the period of production. Firms based on the periods of production to make decisions about their production processes. There are two main periods of production the short run and the long run.

Short Run

In the short run, at least one factor of production is fixed. This means that firms cannot fully adjust all inputs and resources immediately. Typically, capital or factory size might be fixed, while labour or raw materials can be adjusted.

Example: A company can hire or lay off workers to respond to changes in demand, but it cannot quickly build a new factory or close an existing one.

Long Run

In the long run, all factors of production are variable. Firms have enough time to adjust all inputs to respond to changes in demand, technology, or market conditions. This period allows for full flexibility in production decisions.

Example: A company can invest in new machinery, expand its factory, or change its location entirely, responding comprehensively to market trends and demands.

Activity 4.1 Understanding Periods in Production

Materials needed: Notebook and pen Instructions

1. Identify Periods in production: List the two time periods in production and briefly define them in your notebook.

2. Discuss the Periods with a friend or family member: explain the short run, and the other should explain the long run. Use real-life examples in your explanation, like a farmer hiring workers in the short run or buying land in the long run.

3. Differentiate Between Short and Long Run: Create a table in your notebook for differentiating both periods. Focus on their characteristics and what can change in each.

4. Discuss Business Decisions: Talk about how businesses decide between short-run adjustments (e.g., hiring more workers) or long-run investments (e.g., expanding production).

5. Which period do you think is more flexible for businesses? Why?

6. Conclusion: Write a summary of the differences between the short run and long run and share it with the other group of friends in the class.

Read the following then answer the three questions.

A bakery shop opens employing a single worker who produces 50 loaves of bread.

Consumers demanded more bread than the one employee could produce. Due to this demand two more workers were employed. The first new worker increased production by 70 loaves and the second by 80 loaves of bread.

1. How many workers were employed and how much bread did each produce?

2. How many loaves of bread did all workers produce?

3. Find the mean (average) loaves of bread produced by all workers.

Total Product (TP)

Total Product (TP) refers to the total output produced by a firm or individual during a specific period using a given quantity of inputs (like labour and capital). It changes as the quantity of inputs used increases or decreases. TP at any level is the sum of the marginal products up to that level of input employed. From the case above, the bakery shop produced 200 loaves of bread (50 + 70 + 80) when three workers were employed.

Total Product is expressed mathematically as:

MP_(Ii)∑ᵢ₌₁ ^(Q)TP (Q) = TP (Q)= MP₁ + MP₂+ MP₃….+ MPₙ Where TP = Total Product, Q = Quantity, MP = Marginal Product and i = 1, 2, 3 … n Or TP is the product of the total quantity produced by each labour, i.e., AP × L The total product curve initially shows output rising at an increasing rate (increases quickly), then at a decreasing rate (increases slow down) and eventually declining due to diminishing returns.

Marginal Product (MP)

In the case above, the two new workers produced 150 more loaves of bread. The additional output that a firm can produce as a result changing one more unit of a variable factor (for example, labour) is referred to as marginal product. The marginal product initially increases due to the changes. It eventually decreases due to the law of diminishing marginal returns. In the case of the bakery, production reaches a peak at the maximum number of loaves that can be produced by the three workers. A decrease in marginal product can result because adding any more workers to a small bakery will eventually lead to overcrowding, with each additional baker having less equipment and space to use efficiently.

It is calculated as the change in total product divided by the change in the quantity of the variable input (in this case L, labour).

ΔTP ΔL

MP= Where, change in Total Product, ΔTP,= TP₂- TP₁ and change in Labour, ΔL,= L₂- L₁ This means that, ΔTP TP₂ - TP₁ ΔL L₂ -L₁ MP= = The marginal product curve rises initially, reaches a maximum and then declines, reflecting the stages of increasing and diminishing marginal returns.

Average Product (AP)

This is a measure of the output produced per unit of input (for example, labour) employed. From the case above, the average bread produced by each worker was 66.7 loaves of bread (200/3). It helps us understand how efficiently resources are being used in production.

High AP: Indicates efficient use of inputs, where each unit of input contributes significantly to total output.

Low AP: Suggests that the inputs are not being used as efficiently, and each unit of input contributes less to the total output.

The average product rises when the marginal product is higher than the average product. However, when the marginal product drops below the average product, the average product starts to fall. It is calculated as the total product divided by the variable input (labour) TP L AP= Where TP= Total Product, and L = Variable input (labour) The average product curve initially rises, reaches a peak, and then falls as more units of the variable input are added.

Total Factor Productivity (TFP)

Total factor productivity (TFP) is an economic concept that describes the portion of a firm’s output that cannot be explained by the number of inputs (capital and labour) used in production. It highlights how technological advancements, efficiencies, and innovations boost output while keeping input quantities constant.

Total Facor Productivity (TFP)= TP L + K Where TP = Total Product, L = Labour and K = Capital

There are three stages of production. These stages help in understanding how output responds to changes in the number of inputs used (particularly labour).

Consider this table below:

Table 4.1

Workers employed Total Product (TP) Marginal Product (MP) Average Product (AP) 1 6 6 6 2 13 7 6.5 3 22 9 7.3 4 27 5 6.75 5 26 -1 5.2 From the table above, describe the changes in Total Product, Marginal Product and Average Product as the number of workers employed at each level changes.

Stage 1: Increasing Returns to the Variable Input

This occurs when more of a variable input (for example labour) is added to fixed inputs (capital) leading to a greater increase in output. At this stage, the total product increases at an increasing rate (very fast). Marginal and average products also continue to increase. In this stage, production takes place under increasing marginal returns, meaning any additional variable factor employed will contribute more to the total output than the previous one. At this stage, the total product (TP) curve is concave upwards, the marginal product (MP) curve is increasing, and the average product (AP) curve is also rising, but more slowly than the MP curve.

Learner, identify and shade in using a colour the increasing returns achieved as the input (number of workers) varies in the table above.

Stage 2: Decreasing Returns to the Variable Input

In this stage, production is under diminishing marginal returns, meaning each additional input adds less to output than before. The total product continues to rise but at a decreasing rate (slow). The marginal product (MP) starts to decline, though it stays positive, while the average product (AP) decreases after reaching a maximum. The total product (TP) curve is concave downwards, the MP curve is falling, and the AP curve has reached a maximum and is now declining.

Learner, identify and shade in using a colour the decreasing returns achieved as the input (number of workers) varies in the table above.

Stage 3: Negative Returns to the Variable Input

This is a stage where the total product begins to fall as more variable inputs are added.

The marginal product (MP) turns negative, meaning that total output will decrease when an additional input is added. The average product (AP) also keeps declining. The total product (TP) curve slopes downward, the MP curve falls below zero and the AP curve continues to slope downward.

Learner, identify and shade in using a colour the negative returns as the input (number of workers) varies in the table above.

Figure 4.1: TP, MP, AP and Stages of Production

Activity 4.2 Calculating TP, AP, MP, TFP, and drawing curves Do this activity with a friend.

Materials Needed: Notebook, pencil, calculator, and graph paper.

Answer all the questions in your notebook.

Step 1: Examine the table which shows the number of units of labour and the resulting output.

Key TP- Total Product

MP- Marginal Product

AP- Average Product

STAGE I - Increasing Returns STAGE II - Dimishing Returns STAGE III - Maginal Returns Units of Labour Total Product (TP) Marginal Product (MP) MP=TPₙ−TP₍ₙ₋₁) Average Product (AP)AP =TP ÷ Labour 1 10 2 24 3 36 4 44 5 48 6 50

Step 2: Calculating the Total Product, Marginal Product, Average Product, and TFP

1. Total Product (TP): Review the TP values in the table, which show the output produced with each additional unit of labour.

Question: According to the table, what is the Total Product when 5 units of labour are used?

2. Marginal Product (MP): Calculate MP for all levels of labour used, by finding the difference in TP when each additional unit of labour is added.

For example, when labour increases from 1 to 2 units, the MP is 24 - 10 = 14.

3. Average Product (AP): Calculate AP for all levels of labour by dividing each TP by the respective units of labour.

4. Total Factor Productivity (TFP): Assume capital input is constant (5).

a. Calculate TFP for all levels of production.

b. How does TFP change as labour increases?

Step 3: Drawing the Curves

1. Together with your friend, use the data you have worked out to plot the TP, MP, and AP using graph paper. Each curve should be on the same axes, units of labour on the X-axis and TP, MP, AP on the y-axis.

2. What trends do you see in the TP, MP, and AP curves as more labour is added?

Step 4: Show your work to your teacher and also share it with your friends.

With your teacher organise a visit your school kitchen, workshop or a nearby manufacturing shop such as a carpentry shop. Observe the inputs they use in production.

Is the shop using more workers (labour) or machines (capital) in production? There are two main methods of production which are:

1. Labour-Intensive Production

A production situation that relies mainly on human effort rather than machinery to create goods and services is known as Labour-intensive. In this approach, businesses employ a large number of workers to perform various tasks. It is often seen in industries where personal skill, artisanry or customisation is essential.

Examples:

a. Weaving colourful Kente cloth in Ghana heavily relies on skilled artisans who spend many hours doing designs.

b. Producing pottery by hand involves more human effort, as each pot must be shaped, dried and painted carefully.

2. Capital-Intensive Production

In Economics, capital refers to the assets and resources that are used to produce goods and services. It does include money, but buildings, machines, infrastructure and skilled labour are also capital. Some industries have big buildings, machinery, technology and equipment to produce goods and services. Many automated manufacturing processes do not have big inputs of labour (workers) This production situation is referred to as Capital-intensive. This approach is common in industries where large-scale operations are necessary, such as manufacturing, mining, and energy production.

Examples:

a. Building a big factory to produce textiles and using weaving machines is capital intensive.

b. Oil extraction is capital-intensive since companies need skilled labour, specialised machines and technology to explore and find oil and equipment to drill deep into the ground to get it.

Differences Between Labour-Intensive and Capital-

Intensive Production

Table 4.2: Labour-intensive vs Capital-intensive production Aspect Labour-Intensive Production Capital-Intensive Production Primary Resource It relies mainly on human labour It relies on machinery and technology Initial Investment It requires lower investment in assets.

It requires higher investment in assets.

Production Flexibility

There is high flexibility to customise products There is low flexibility to customise products.

Employment It creates more job opportunities. It creates fewer job opportunities due to automation.

Cost Structure

There is a high proportion of labour costs.

There is a high proportion of fixed capital costs.

Activity 4.3 Identifying Production Methods

Materials needed: Notebook, pen and pencil.

Instructions:

1. Introduction: Identify and explain the two production methods in your notebook.

2. Study each key ASPECT listed in the table below carefully. Using the internet or an Economics text book find out what each ASPECT means in terms of

3. Copy the Table: Using the results of your research and the 14 characteristics of PRODUCTION printed below the table, place each one in the correct column. Two have been done for you.

Aspect Capital-Intensive Production Labour-Intensive

Production Primary Input

Initial Investment High investment in capital assets Flexibility Cost Structure Skill Requirements Production Scale

Example Industries Agriculture, textiles, handicrafts NB: Characteristics – seven can be linked to capital intensive, seven to labour intensive production

• Skilled labour for operating and maintaining equipment

• A high proportion of fixed capital costs

• High investment in capital assets

• Less flexible, better suited for mass production

• Can vary from low-skilled to highly skilled labour

• Agriculture, textiles, handicrafts

• More adaptable to changes in demand and customisation

• Suitable for large-scale production

• Lower investment in capital assets

• A high proportion of labour costs

• Machinery, equipment, technology

• Suitable for small to medium-scale production

• Automobile manufacturing, oil refining, electronics

• High level of flexibility, changes easily made to meet new circumstances

4. Which method of production do you think is more beneficial for a developing country? Why? Share your findings.

5. Compare your work with a friend and respectfully seek help from your teacher if you have any difficulties.

Cost It is the monetary value an individual, group or firm spends in producing goods and services. In Economics, cost can be seen as the expenditure incurred in the course of revenue generation. Cost comes in different forms such as fixed cost (FC), variable (VC), total cost (TC), opportunity cost, sunk cost, explicit cost, implicit cost, time horizons, short-run cost and long-run cost.

Fixed Cost (FC)

Fixed cost is the cost or expenditure that a firm or business incurs irrespective of volume of production. It does not change with the level of output. Expenses paid as rent, salaries of permanent workers or staff, insurance premiums and depreciation (wearing out) of equipment are all examples of fixed costs. Fixed cost is illustrated on a graph by a horizontal line since it does not vary with the output level.

Variable Cost (VC)

Variable cost is the cost that directly varies with the level of output. This cost is incurred as production increases. Cost of labour, cost of raw materials and utility cost directly in the line of production are examples of variable cost. Variable cost curve slopes upwards, indicating that it varies with increasing output.

Total Cost (TC)

It is the total of the fixed cost and the variable cost at any given level of production. The total cost curve slopes upwards starting from the fixed cost line and shows that total cost increases as output increases.

Other Types of Cost in Economics

Opportunity Cost

Opportunity cost is the next best alternative forge in making a decision. It shows the benefits that could have been forgone by choosing a different option.

For example,

• If a student chooses to work instead of going to school, then the opportunity cost of working for money is the school he or she has forgone.

• If an individual chooses to own a car instead of buying a plot of land, then the opportunity cost of owning a car is forgone. Note must be taken that the value of the chosen alternative and the foregone alternative are the same.

• Forgone revenue from diverting resources to a new project

• Cost of delaying a project or decisions.

Sunk Cost

Sunk cost is the cost that has been incurred and cannot be recovered. This cost does not affect future economic decisions. For example, advertising expenses and research and development expenditures incurred already, initial investment in new buildings and projects, cost of buying and leasing new equipment and training cost for new employees.

Explicit Cost

It refers to direct out-of-pocket payments for inputs in the line of production. It is the actual cash payment made to the factors in the line of production. For instance, wages, rent, materials and utility costs.

Implicit Cost

Implicit cost is a non-cash cost that is the opportunity cost of using the resources owned by the company or firm. For instance, the use of company buildings or equipment and the time spent.

Economic Cost

Economic cost refers to the sum of both explicit and implicit cost and it is the total cost of doing one action over the other including out-of-pocket expenses and the opportunity cost (the best alternative forgone) Time Horizons It refers to the distinction between long and short runs. It enables one to understand how firms make decisions over different time horizons.

Short-run Cost

The short run is a period in the line of production so short that at least one factor of production is fixed. The fixed factor is capital, for example, machinery and building.

Long run Cost It is a period so long that all factors of production are variable. In this period all firms can adjust all their inputs including capital so that in the end, there is no fixed capital.

The long-run cost allows firms to change their production ability to meet demand. Some examples include advertising and marketing campaigns, training and development, utility costs (electricity, water) for a large facility, equipment maintenance and repair, supply and organization.

Figure 4.2: Graph showing the relationship between TC, VC and FC

Activity 4.4 Understanding Costs

Materials needed: Paper and pens for calculations Scenario: The Orange Stand Imagine that you and your friends are running an orange stand at a school fair.

You plan to sell 100 oranges.

1. Cost breakdown:

a. Fixed Costs (Costs that do not change):

i. Stand rental: 20 cedis

ii. Equipment (tables and containers): 30 cedis

b. Variable Costs (Costs that change with production):

i. Oranges: 50 cedis (cost for 100 oranges)

ii. Labour (2 friends helping, 10 cedis each): 20 cedis

2. Instructions:

a. Use the information provided above to calculate the following cost concepts in your notebook:

i. Total Fixed Costs (TFC): (Add the totals for stand rental and equipment costs.)

ii. Total Variable Costs (TVC): (Add the totals of the cost for oranges and labour costs.)

iii. Total Costs (TC): (Add your fixed costs and variable costs together.)

iv. Opportunity Cost: (Think about what you are giving up by spending time on the orange stand.)

v. Sunk Cost: (Identify any cost element you cannot get back after spending.)

3. Use your calculation to sketch the cost curves for TC, TFC and TVC. (On the x-axis (cost), choose 1cm to 5 units, and on the y-axis (output), choose 1cm to 20 units).

4. Share your findings with a friend at school.

Total Cost (TC)

Total cost is calculated by adding the fixed costs to the variable costs. The total costs are expressed mathematically as:

TC = TFC + TVC Where TFC = Total Fixed Cost and TVC = Total Variable Cost.

The total cost curve does not start from zero because of the fixed cost but starts slightly above the origin on the vertical axis and slopes upwards to show that as output increases, the total cost also increases.

Average Fixed Cost (AFC)

Average fixed cost is the amount of money you spend on each fixed input used production process. It is simply the total fixed cost per unit of output produced. The average fixed cost per output becomes smaller as more goods are produced because it is spread over large output. Average fixed cost is calculated by dividing the total fixed cost by the quantity of goods produced. AFC is expressed mathematically as TFC Q AFC= The AFC curve has a downward-sloping shape but never touches the horizontal axis, though it gets closer and closer to it.

Average Variable Cost (AVC)

This is the amount of money spent on each variable input employed in the process of production. It is the variable cost per unit of output produced. It is calculated by dividing the total variable cost by the output of goods produced.

Mathematically, TVC

Q AVC= The AVC falls initially, attains minimum and rises thereafter (it is u-shaped). This is because, at the initial stages of production, firms enjoy increasing marginal returns.

After all, addition to labour increases output so the AVC falls. After a certain limit, diminishing returns sets in where additional output begins to fall and the AVC begins to rise. This is known as the law of diminishing marginal returns.

Average Cost (AC or ATC)

This refers to the total cost per unit of output produced. It is calculated by dividing the total cost by the quantity of the commodity produce. It can also be calculated by adding the average fixed cost (AFC) to the average variable cost (AVC). The formula is T C Q AC= OR AC = AFC + AVC The AC curve falls initially due to increasing marginal returns and later rises due to diminishing marginal returns. It is also u-shaped.

Marginal Cost (MC)

Marginal cost refers to the additional cost of producing one more unit of output. It is the additional cost incurred as a result of increasing output by one more unit. It is calculated by dividing the change in total cost by the change in output.

ΔTC ΔQ

MC= Where, ΔTC = TC₁ - TC₀ and ΔQ = Q₁ - Q₀ Therefore TC₁ - TC₀ Q₁ -Q₀ = ΔTC ΔQ MC= OR ΔTC ΔQ MC= Where, ΔTVC =TVC₂ - TVC₁, ΔQ=Q₂ - Q₁ The MC curve is also U-shaped and meets the AVC and AC curves at the minimum points of the AC and AVC curves.

Figure 4.3: Graphs showing the relationship between marginal and average costs

Example calculations for Total Costs, Average Variable Costs Average Total Costs and Marginal Costs Imagine a small juice stand run by a lady called Ama. She sells 200 cups of fresh pineapple juice per day and therefore incurred the following expenses:

Rent for the stand: GH₵ 100 Cost of pineapples per month: GHS 300 Workers’ salary: GH₵ 200 An increase in demand for the fruit juice compelled the lady to increase the quantity to 210 and as a result her total cost increased by GH₵ 20.

The total cost will be:

TC = Fixed Costs (Rent) + Variable Costs (pineapple + Salary) TC = 100 + 300 + 200 = GH₵ 600 300+200 200 AVC= =GH₵ 2.50 per cup 100 200 AFC= = GH₵ 0.50 per cup 600 200 ATC= = GH₵ 3.00 per cup 620-600 210-200 MC= = GH₵ 2.00 per cup Sample Case Study The school matron cooks rice water every Monday as breakfast. She uses 10 electric stoves, 15 pots, 10 bags of rice, 3 bags of sugar, 200 canteens of ideal milk and 20 cooks to prepare breakfast every Monday when school is in session. If she uses 20 gallons of water to prepare the rice water:

1. Identify the Fixed Cost and Variable Cost items for preparing rice water every Monday

2. Explain fixed, variable and total costs using the case study.

3. Given that the 10 electric stoves cost 10,000 cedis, the 15 pots cost 1500 cedis, the 10 bags of rice cost 7000 cedis, the 3 bags of sugar cost 1200 cedis, the 200 canteens of ideal milk cost 12,000, the 20 cooks take a wage of 150 cedis per person for cooking breakfast on Mondays and the 20 gallons of water cost 100 cedis, sketch the FC, VC and TC curves.

Activity 4.5 Calculating TC, MC, ATC, TFC, TVC, AVC, AFC using formulae Do this activity with a friend.

Materials needed: Notebook, Pen, Pencil, Calculator Instructions Analyse the Cost table below carefully and use the information to answer the questions that follow.

Quantity TFC TVC TC AFC AVC MC ATC

0 2000 0 2000 - - - - 1 2000 200 2200 2 2000 380 X 3 2000 X 2540 4 2000 680 X 5 2000 800 2800 6 2000 900 2900 7 2000 X 2980 8 2000 1040 3040 9 2000 X 3080 10 2000 1120 X

1. Calculate TVC when quantity is 3, 7 and 9 Quote the formula for TVC. Insert the right values into the formula. Simplify to arrive at your answer.

2. Calculate TC when the quantity is 2, 4 and 10.

Quote the formula for TC. Insert the right values into the formula. Simplify to arrive at your answer.

3. Estimate the values for AFC, AVC, MC and ATC for all quantities.

Quote the formula for AFC, AVC, MC and ATC respectively and follow the steps of inserting the right values into the formula. Simplify to arrive at your answer.

4. Explain why at Q = 0, TVC is 0 and AFC, AVC, MC and ATC are –

5. Compare your findings with your friend. Be respectful, polite and tolerance towards your friends.

Activity 4.6 Sketching TC, MC, ATC, TFC, TVC, AVC, AFC

1. Use your completed table in activity 4.5 to sketch TC, TFC, TVC on one graph sheet and MC, ATC, AVC, AFC on another graph sheet.

2. Use MS PowerPoint to sketch the curves for presentation.

3. Present your findings to your friends in class.

4. Accept and respect the findings of your friends and make constructive criticism.

Every day, many people sell items at shops, supermarkets and marketplaces to customers in return for money. Learner, what is the money received from these transactions called?

The money received from selling goods or services by a business is called revenue.

Revenue is one of the most important concepts in Economics because it shows how well a company is doing financially. It is determined by multiplying the price of the goods by the number of units sold (Revenue= Price × Units sold) Types of revenue ₁. Operating revenue is the money a business makes from its main activities. For

example, if a bakery sells bread and cakes, the money it receives from sales is called operating revenue.

2. Non-operating revenue is money that a business earns from activities that are not its main focus. This includes interest from savings accounts or money made from selling old equipment.

Why is Revenue Important?

₁. Revenue helps businesses to grow. If a company earns more money, it can invest in new products, hire more workers or expand to new locations.

2. Revenue can show how well an entire industry or economy is performing.

High revenue for a business can be a sign of good performance.

3. Revenue is used to calculate profit.

4. Revenue helps businesses to make important decisions about pricing and production.

Revenue versus Profit Aspect Revenue Profit Definition The total money received from sales.

The money that is left after all costs are paid.

Calculation Calculated by multiplying the price by the quantity sold.

Calculated by subtracting costs from revenue.

Importance It shows how much a business sell.

It shows how much a business makes after expenses.

Example of how revenue is calculated James Fast-Food sells fried rice and jollof rice. James Fast-Food sells 70 packs of fried rice at Gh¢ 18 and 60 packs of jollof rice at GH¢ 15 a week.

The revenue received by James Fast-Food for one week from selling fried rice is Gh¢ 1260 (70 × 18) and that of jollof rice is Gh¢ 900 (60 × 15).

You should recognise that in this example the total revenue James makes by selling his two products is not his profit.

Activity 4.7 Understanding Revenue Theory

Material needed: Notebook, Pen, Pencil Instructions:

1. Choose a product

a. Decide on one product you will focus on for this task (e.g., a popular snack, drink, or any item sold at the school canteen or nearby shop).

b. Write down the name of the product.

2. Visit the school Canteen or Shop

a. Go to the school canteen, a nearby shop, or a market stall where this product is sold.

b. Politely ask for permission to collect information on the product.

3. Collect Data on Price and Quantity

a. Ask the seller or observe: Find out the price of a single unit of the product. Write down this price.

b. Check or ask about quantity: Find out how many units of this product are available for sale. If you are not sure, ask the seller or make a reasonable estimate.

c. Record this information in a simple table like this:

Product name Price per unit (Cedis) Quantity available for sale (units) E.g., Fanta 5.00 cedis 56 bottles

4. Calculating Revenue: Use the data you have collected to calculate the potential revenue if all the items are sold.

a. Quote the formula for Total Revenue.

b. Insert the right values into the formula

c. Work out the equation to arrive at your answer.

5. Conclusion: Based on your findings, explain revenue and state any two ways in which the knowledge of revenue can help you start your own business.

Calculating Total, Average and Marginal

Revenue Serwah is a business lady living in Kumasi, Ghana. She sets up a local drink (sobolo) stand outside her house during the hot season. She sells her ‘Sobolo’ for GH₵ 3 per plastic bottle. In three days and made the following sales:

Day 1: 10 bottles Day 2: 15 bottles Day 3: 20 bottles.

1. How much revenue will Serwah receive after the three days’ sales?

2. How much revenue will Serwah receive if she sells one bottle of ‘Sobolo’ on any day?

3. How much additional revenue will Serwah receive if she sells one more bottle of ‘Sobolo’ on any day?

Total Revenue (TR)

The total money a firm receives from selling a given number of commodities is known as Total Revenue. From the scenario above, Serwah’s total revenue for the three days was GH₵ 135 (45 bottles × GH₵ 3). It is calculated by multiplying the price of the goods or services by the quantity sold. That is:

TR= Price × Quantity Sold or MR_(Ii)∑ᵢ₌₁ ^(Q)TR (Q) = MR_(Ii)∑ᵢ₌₁ ^(Q)TR (Q) = TR (Q)= MR₁ + MR₂+ MR₃….+ MRₙ Where TR = Total Revenue, Q = Quantity, MR = Marginal Revenue and i = 1, 2, 3 … n Total Revenue shows how much money a business makes and helps us understand how big a business is. It can be viewed as the sum of all marginal revenues (MR) over the quantity of output produced.

Average Revenue (AR)

Average Revenue is the income received from selling one unit of a commodity. From the above scenario, Serwah’s average revenue received was GH₵ 3 (135/45). It is derived by dividing the total revenue by the quantity sold. It is expressed mathematically as:

T R Q AR= Where TR = Total Revenue, and Q = Quantity Average Revenue helps businesses to decide how to price their products and shows how much money they make for each item sold.

Marginal Revenue (MR)

The added revenue that a firm receives when it sells one more unit of a commodity is known as Marginal Revenue. In the scenario above, Serwah’s added revenue was GH₵3 which is equal to the price of the commodity. It is calculated as the change in total revenue resulting from the change in quantity sold. That is:

ΔTR ΔQ

MR= Where ΔTR= TR₁ - TR₀ and ΔQ= Q₁ - Q₀ This implies that, ΔTR TR₁ - TR₀ ΔQ Q₁-Q₀ MR= = Marginal Revenue helps businesses to decide how much to produce. Firms usually make more items if the additional money from selling one more is greater than the additional cost to make it.

Activity 4.8 Calculating TR, AR and MR

Materials needed: Notebook, Pen, Calculator The following table shows different quantities of mangoes sold at different prices.

Your task is to calculate TR, AR and MR. Follow the instructions below the table.

Quantity produced (or sold) (Q) (Mangoes) Price per unit (P) Total Revenue (TR) TR= P × Q Average Revenue (AR) T R Q AR= Marginal Revenue (MR) TR₁ - TR₀ Q₁ -Q₀ MR= 2 10 4 8 6 6 8 4 10 2 Instruction

1. From the table above:

a. Calculate the TR for all quantity levels

b. Calculate the AR for all quantity levels

c. Calculate the MR for all quantity levels

2. For each calculation (1a to c) above:

a. Quote the formula for the concept.

b. Insert the right values into the formula.

c. Calculate to arrive at your answer.

3. Explain why there is no MR for the first line in the table.

4. Show your work to a friend and compare your answers.

5. Politely seek help from your teacher if you face any challenges.

6. Compare your findings your friends in class.

Total Revenue Curve

_(The) total revenue (TR) curve shows the relationship between the total revenue a seller receives and the quantity of goods it sells. It is a graph that illustrates how a business’s revenue changes as it sells more units of its product. On the graph, the total revenue is represented on Y-axis with the quantity produced on the X-axis.

The total revenue curve generally slopes upwards at first, reach its maximum point and start to slope downward.

Figure 4.4: Showing the relationship between Total Revenue and quantity produced Average Revenue Curve The average revenue (AR) curve represents the relationship between the price per unit (or revenue per unit) and the quantity sold. AR curve is also known as the demand curve for the firm. In a perfect competitive market, the AR curve is a horizontal line but in an imperfect market (like monopolies), AR curve slopes downwards showing that prices must reduce as more units of the commodity are sold. In drawing the Average Revenue curve, the average revenue is represented on Y-axis while the units of output produced is represented on the X-axis.

Figure 4.5: Showing relationship between Average Revenue and Output Marginal Revenue Curve The marginal revenue (MR) curve shows the relationship between the marginal revenue and the units of output sold. The slope of the MR curve varies depending on the type of market. In the Perfect competitive market, the MR curve is horizontal line and equal to the price but in the imperfect market the MR curve has a downward slope and lies below the average revenue (AR) or demand curve. On the graph, the MR is represented on the Y-axis while the units of output produced/sold are represented on the X-axis.

Figure 4.6: Showing the Relationship between Marginal Revenue and Quantity The relationship between the Total revenue, Average revenue and marginal revenue curves In a perfectly competitive market, AR = MR = P (price), and the AR curve is a horizontal line.

In an imperfect market (e.g., monopoly), the AR curve slopes downwards, and the MR curve lies below the AR curve. This is because, in order to sell more units, the firm must lower the price (P), which reduces the revenue gained from the earlier units sold.

This is shown in the infographic below.

Figure 4.7: The relationship between Total Revenue, Average Revenue and Marginal Revenue

Activity 4.9 Plotting TR, AR and MR

1. Use your completed table in activity 4.8 to plot TR, AR and MR curves on the same sheet of graph sheet or using MS Excel.

2. Compare your findings with your friends in class.