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Revenue

Revenue refers to money received from sales. Total revenue (TR) is the total amount received and is calculated by multiplying price by quantity sold. Average revenue (AR) is TR divided by quantity and is equal to price in perfect competition. Marginal revenue (MR) is the change in TR from selling one more unit. In perfect competition, MR and AR are constant as price doesn't change. In imperfect competition, MR and AR decrease as output rises as firms lower price. TR increases at a diminishing rate as MR decreases from positive to zero to negative.

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483 views

Revenue

Revenue refers to money received from sales. Total revenue (TR) is the total amount received and is calculated by multiplying price by quantity sold. Average revenue (AR) is TR divided by quantity and is equal to price in perfect competition. Marginal revenue (MR) is the change in TR from selling one more unit. In perfect competition, MR and AR are constant as price doesn't change. In imperfect competition, MR and AR decrease as output rises as firms lower price. TR increases at a diminishing rate as MR decreases from positive to zero to negative.

Uploaded by

Tanya Arora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 7 REVENUE

Revenue refers to the money receipts that a firm gets from the sale of its output. It is directly influenced by the
sales level i.e. as the sales increase, revenue also increases. It is equal to quantity of output sold multiplied by
the market price of the product.

Revenue

Total Revenue Average Revenue Marginal Revenue

Total Revenue: It refers to the total amount of money realized by a firm by selling a certain unit of output. It is
the total income of a firm.
TR= Price × Quantity
TR= AR × Quantity
TR= ∑MR

Average Revenue: It refers to revenue per unit of output sold. AR is equal to per unit sale receipts which is
equal to price of the good.

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
AR= 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
In Economics, AR and price imply the same, since they represent the same values.
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
AR= 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
P×Q
AR = (TR= Price × Quantity)
𝑄
AR= Price
The seller gets what the buyer pays therefore, Price and AR are one and the same thing.
A buyer’s demand curve represents the quantities demanded by a buyer at various price i.e. it shows the
various levels of average revenue at which different quantities of a good are sold by the seller. Therefore, AR
curve and Demand curve for a firm are the same.

Marginal Revenue: It refers to the addition to the total revenue when one additional unit of output is sold.
MR can also be defined as change in TR (∆TR) divided by change in quantity sold (∆Q). Example: If 5 units of a
good are sold for Rs.50 and 6 units are sold for Rs.54, so the MR of the 6 th unit will be Rs.4.
MRn = TRn – TRn-1
When change in units sold is more than one, then MR can be calculated as:
∆𝑇𝑅
MR= ∆𝑄
Example: If 5 units of a good are sold for Rs.50 and 8 units are sold for Rs.80, then MR will be:
𝑇𝑅 𝑜𝑓 8 𝑢𝑛𝑖𝑡𝑠−𝑇𝑅 𝑜𝑓 5 𝑢𝑛𝑖𝑡𝑠 30
MR= = = Rs.10
8 𝑢𝑛𝑖𝑡𝑠−5 𝑢𝑛𝑖𝑡𝑠 3

1
❖ Relationship among TR, AR and MR in Perfect Competition (When Price Remains
Constant)
Perfect Competition is a market form where
• There are large number of buyers and sellers
• The product is homogeneous i.e. all sellers sell identical units of a product.
• There is free entry and exit of firms
• Buyers and sellers have perfect knowledge
• Price is determined by the industry. A firm has no control over the price, that is why AR/ price of the
commodity remains same.

Qty. sold (units) AR TR MR


1 10 10 10
2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10
6 10 60 10
7 10 70 10

➢ Relation between TR and MR


1. Price of the commodity remains same. As a result, MR is
constant and the curve is a horizontal straight line parallel to x-
axis. Since MR remains constant, therefore TR increases at a
constant rate.
2. TR curve is positively sloped straight line forming an angle of
45° at the origin.
3. TR curve passes through the origin as TR is zero at zero level of
output. However, MR is never zero because it denotes a
change in the revenue when additional unit is sold.

➢ Relation between AR and MR


Under this, industry is the price maker & firm is the price taker.
1. In perfect competition, additional units can be sold at a same
price. No firm is in a position to influence the market price of
the product. Therefore, price per unit itself denotes the
revenue earned from additional unit. It implies AR = MR.
2. AR curve & MR curve co-incide in a horizontal straight line
parallel to x-axis.
3. Price (AR) remains same at all levels of output and is equal to
MR, therefore AR curve (demand curve) is perfectly elastic.

2
➢ Relation between TR and Price Line OR Finding TR using MR/AR curve
• When price remains constant at all the levels of output,
then Price = AR = MR. Therefore, price line is same as MR
curve.
• Also, TR = ∑MR. So, the area under MR curve or price line
will be equal to TR.
• TR at OQ level of output = Area under price line = OP × OQ
= OPAQ

❖ Relationship among TR, AR and MR in Imperfect


Competition (When Price Falls with rise in output)
Imperfect Competition is a market form where
• There are large number of buyers and sellers
• The product is heterogeneous i.e. products are differentiated on the basis of colour, quality, brand etc.
• There is no absolute free entry and exit of firms
• Buyers and sellers do not have perfect knowledge
• Each firm has partial control over price as there is competition i.e. the product has close substitutes
available.

Qty. sold (units) AR TR MR


1 10 10 10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 -2
8 3 24 -4

➢ Relation between AR and MR


1. As firms sell more by lowering the price, AR falls with increase in
sale. As a result, MR falls & is less than AR. Both AR & MR curves
slopes downwards from left to right.
2. MR can fall to zero & become negative but AR is always positive
because it is equal to price.
3. Fall in MR is more than that in AR therefore MR curve is steeper
than the AR curve.
4. MR curve remains below AR curve, the reason is that MR is
limited to one unit, whereas AR is derived by all the units. As a
result, AR shows comparatively lesser fall than fall in MR.
3
➢ Relation between TR and MR
1. When MR is falling positively, TR increases at a diminishing rate
(or when TR rises, MR is positive). This is shown till 5th unit sold
and before points A and B in the diagram.
2. When MR is zero, TR is maximum and constant. (Or when TR is
maximum, MR is zero). This can be seen at point A and B in the
diagram i.e. at 6th unit sold.
3. When MR becomes negative, TR decreases. (Or when TR falls, MR
is negative). This can be seen after points A and B in the diagram
i.e. when 7th and 8th units are sold.

❖ General Analysis
General Analysis of relation among TR, AR and MR refers to behaviour
of revenue curves when price of commodity rises, remains constant or
falls in the market. No specific form of market is referred.

Qty. sold Price/AR TR MR


1 10 10 10
2 20 40 30
3 30 90 50
4 40 160 70
5 40 200 40
6 35 210 10
7 30 210 0
8 25 200 -10
9 20 180 -20
10 15 150 -30

➢ Relation between TR and MR


1. When TR increases at an increasing rate, MR increases. This can be
seen upto 4 units of output i.e. at OM level of output.
2. When TR increases at decreasing rate, MR decreases positively.
This can be seen from 4 to 6 units of output i.e. between M and M1
level of output.
3. When TR is maximum and constant, MR is zero. This can be seen at
7th unit of output i.e. at OM1 level of output.
4. When TR decreases, MR becomes negative. This can be seen from
7th to 10th units of output i.e. beyond OM1 level of output.

4
➢ Relation between AR and MR
1. AR increases as long as MR is higher than AR (or when MR >
AR, AR increases). This can be seen upto 4th unit of output
i.e. up to point E.
2. AR is maximum and constant when MR is equal to AR (or
when MR = AR, AR is maximum). This can be seen at 5th unit
of output i.e. at point E.
3. AR falls when MR is less than AR (or when MR < AR, AR falls).
This can be seen from 6th to 10th unit of output i.e. beyond
point E.
4. MR falls to zero and becomes negative, but AR is always positive. This can be seen beyond 7th unit of
output i.e. at point D and beyond it.

Note: MR is the slope of TR curve. The slope of TR curve measures the rate of change in TR due to change in
output i.e. MR.

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