Revenue
Revenue :- Money received by a firm from the sale of a given output in the market.
Total Revenue: Total sale receipts or receipts from the sale of given output.
TR = Quantity sold × Price (or) output sold × price
Average Revenue: Revenue or Receipt received per unit of output sold.
- AR = TR / Output sold
- AR and price are the same.
- TR = Quantity sold × price or output sold × price
- AR = (output / quantity × price) / Output/ quantity
- AR= price
AR and demand curve are the same. Shows the various quantities demanded at various prices
Marginal Revenue: Additional revenue earned by the seller by selling an additional unit of output.
- MRn = TR n – TRn-1
- MR n = Δ TR n / Δ Q
- TR = Σ MR
Relationship between AR and MR
(when price remains constant or perfect competition)
Under perfect competition, the sellers are price takers. Single price prevails in the market. Since all the goods are homogeneous and are sold at the same price AR = MR. As a result AR and MR curve will be horizontal straight line parallel to OX axis. (When price is constant or perfect competition)
Relation between TR and MR
(When price remains constant or in perfect competition)
When there exists single price, the seller can sell any quantity at that price, the total revenue increases at a constant rate (MR is horizontal to X axis)
| Units | Price | TR | AR | MR |
| 1 | 10 | 10 | 10 | 10 |
| 2 | 10 | 20 | 10 | 10 |
| 3 | 10 | 30 | 10 | 10 |
| 4 | 10 | 40 | 10 | 10 |
Relationships between AR and MR under monopoly and monopolistic competition
(Price changes or under imperfect competition)
- AR and MR curves will be downward sloping in both the market forms.
- AR lies above MR.
- AR can never be negative.
- AR curve is less elastic in monopoly market form because of no substitutes.
- AR curve is more elastic in monopolistic market because of the presence of substitutes
Relationship between TR and MR.
(When price falls with the increase in sale of output)
- Under imperfect market AR will be downward sloping – which shows that more units can be sold only at a less price.
- MR falls with every fall in AR / price and lies below AR curve.
- TR increases as long as MR is positive.
- TR falls when MR is negative.
- TR will be maximum when MR is zero.
| Units | Price | TR | AR | MR |
| 1 | 10 | 10 | 10 | 10 |
| 2 | 9 | 18 | 9 | 8 |
| 3 | 8 | 24 | 8 | 6 |
| 4 | 7 | 28 | 7 | 4 |
| 5 | 6 | 30 | 6 | 2 |
| 6 | 5 | 30 | 5 | 0 |
| 7 | 4 | 28 | 4 | -2 |
Break-even point: It is that point where TR = TC or AR=AC. Firm will be earning normal profit.
Shut down point : A situation when a firm is able to cover only variable costs or TR = TVC
Formulae at a glance:
- TR = price or AR × Output sold or TR = Σ MR
- AR (price) = TR ÷ units sold
- MR n = MR n – MR n-1
Firm’s Demand Curve
It is a curve showing relationship between price of the product and its quantity demanded in the market. It is also known as AR curve and firm’s price line.
Firm’s Revenue Curve in Different Market
1) Perfectly Competitive Market – Under perfect competition, price remains to be constant. So firm is a price taker. It cannot change the market price. It can sell any quantity at the prevailing price.
| Unit | AR | TR | MR |
| 1 | 10 | 10 | 10 |
| 2 | 10 | 20 | 10 |
| 3 | 10 | 30 | 10 |
| 4 | 10 | 40 | 10 |
| 5 | 10 | 50 | 10 |
Relationship Between TR, AR and MR
- TR increases at constant rate, MR is constant.
- P=AR=MR
2) Monopoly Market and Monopolistic Competitive Market – Under this, price is not constant. A firm can sell any quantity but it has to reduce the price. There is a negative or inverse relationship between, the price of the product and demand for the product. Accordingly, firm’s AR curve and MR curve slopes downward.
| Unit | 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 |
