UNIT- 3
CONCEPTS OF REVENUE
Total, Average and Marginal Revenue: The revenue of a firm jointly with its costs ascertains
profits. The term revenue denotes to the receipts obtained by a firm from the scale of definite quantities of a
commodity at various prices. The revenue concept relates to total revenue, average revenue and marginal
revenue.
Total Revenue – It is the total sale proceeds of a firm by selling a commodity at a given price. If a
firm sells 3 units of an article at $ 24, its total revenue is 3 x 24. Thus total revenue is price per unit
proliferated by the number of units sold, i.e. TR = P x Q, where TR is the total revenue, P the price and
Q the quantity.
Average Revenue – It is the average receipts from the sale of certain units of the commodity. It is
obtained by dividing the total revenue by the number of units sold. The average revenue of a firm is in
fact the price of the commodity at each level of output since TR = P x Q, therefore, AR = TR / Q = P x
Q / Q = P.
Marginal Revenue (MR) – In addition to total revenue as a result of a small hike in the sale of a firm.
Algebraically it is the total revenue earned by selling N units of the commodity instead of N-1 i.e.,
MRn = TRn – TRn-1.
Relationship between TR, AR and MR
Fig. illustrates the relationship between TR, AR and MR when firm’s demand curve (AR curve) slopes
downward.
(i) When marginal revenue curve declines till point
‘M’ in part ‘B’, total revenue is increasing at
diminishing rate as shown by the segment O to B
in part ‘A’.
(ii) When marginal revenue becomes zero at point
‘M’ in part ‘B’, total revenue is at its maximum as
shown by point ‘B’ in part ‘A’.
(iii) When marginal revenue falls, the average
revenue also falls but lies above the marginal
revenue curve. Implying that in a situation of
falling price, MR falls even faster.
(iv) After point ‘M’, marginal revenue becomes
negative. Now total revenue starts diminishing.
(v) A situation of zero AR obviously implies a
situation of zero TR. (Zero price situation is not a
general phenomenon, but, of course has examples
as in government or charitable hospitals where
medicines are given to the patients at zero price.)
,Some other relations between Total Revenue, Average Revenue and Marginal
Revenue!
1. Both AR and MR are calculated from TR: The average cost and marginal costs are
calculated from total cost. In the same fashion, average revenue and marginal revenue can also
be calculated from total revenue.
2. When AR and MR are Parallel to X-axis: If average revenue and marginal revenue are
parallel to horizontal axis then it means both AR and MR are equal to each other i.e. AR = MR.
It has been shown with the help of table 2 and diagram 2.
From this table, it is clear that when output increases prices or AR remains the same i.e. Rs. 10.
In figure 2, on X-axis, we have measured
output and on Y-axis revenue. Average and
marginal revenue are horizontal lines which
are parallel to X-axis. It is a case under
perfect competition.
, 3. When both AR and MR are Straight Lines: Under imperfect competition, when AR falls,
MR also falls and it is always below AR line because there are large numbers of buyers and
sellers, products are not homogeneous and the firms can enter or exit the market. It can be shown
with the help of a table 3.
It is clear from the table that as price falls (AR falls) from Rs. 10 to Rs. 6, the total revenue (TR)
increases from Rs. 10 to Rs. 30 at a diminishing rate. MR also falls from Rs. 10 to Rs. 2, MR is
the rate at which the TR changes. It can also be drawn with the help of a Fig. 3.
In Fig. 3, AR and MR curves have been
shown. It shows when AR curve falls MR
curve also falls, and the MR curve will be
below the AR curve. But, this situation
exists only under monopoly and imperfect
competition.
4. When AR and MR are Convex: In fig.
5, AR and MR curves are convex to the
origin. It means as more and more units of a
commodity are sold, average revenue falls at
lower speed. MR curve also moves in the
same direction. The convexity shows that
MR falls but at a faster speed.
5. When AR and MR are Concave: The
figure 6 shows that if AR is concave to the
origin, MR will also be concave to the
origin. It means average revenue is falling at
a higher rate for each additional unit of a
commodity sold. Similar would be the case
for MR curve.
CONCEPTS OF REVENUE
Total, Average and Marginal Revenue: The revenue of a firm jointly with its costs ascertains
profits. The term revenue denotes to the receipts obtained by a firm from the scale of definite quantities of a
commodity at various prices. The revenue concept relates to total revenue, average revenue and marginal
revenue.
Total Revenue – It is the total sale proceeds of a firm by selling a commodity at a given price. If a
firm sells 3 units of an article at $ 24, its total revenue is 3 x 24. Thus total revenue is price per unit
proliferated by the number of units sold, i.e. TR = P x Q, where TR is the total revenue, P the price and
Q the quantity.
Average Revenue – It is the average receipts from the sale of certain units of the commodity. It is
obtained by dividing the total revenue by the number of units sold. The average revenue of a firm is in
fact the price of the commodity at each level of output since TR = P x Q, therefore, AR = TR / Q = P x
Q / Q = P.
Marginal Revenue (MR) – In addition to total revenue as a result of a small hike in the sale of a firm.
Algebraically it is the total revenue earned by selling N units of the commodity instead of N-1 i.e.,
MRn = TRn – TRn-1.
Relationship between TR, AR and MR
Fig. illustrates the relationship between TR, AR and MR when firm’s demand curve (AR curve) slopes
downward.
(i) When marginal revenue curve declines till point
‘M’ in part ‘B’, total revenue is increasing at
diminishing rate as shown by the segment O to B
in part ‘A’.
(ii) When marginal revenue becomes zero at point
‘M’ in part ‘B’, total revenue is at its maximum as
shown by point ‘B’ in part ‘A’.
(iii) When marginal revenue falls, the average
revenue also falls but lies above the marginal
revenue curve. Implying that in a situation of
falling price, MR falls even faster.
(iv) After point ‘M’, marginal revenue becomes
negative. Now total revenue starts diminishing.
(v) A situation of zero AR obviously implies a
situation of zero TR. (Zero price situation is not a
general phenomenon, but, of course has examples
as in government or charitable hospitals where
medicines are given to the patients at zero price.)
,Some other relations between Total Revenue, Average Revenue and Marginal
Revenue!
1. Both AR and MR are calculated from TR: The average cost and marginal costs are
calculated from total cost. In the same fashion, average revenue and marginal revenue can also
be calculated from total revenue.
2. When AR and MR are Parallel to X-axis: If average revenue and marginal revenue are
parallel to horizontal axis then it means both AR and MR are equal to each other i.e. AR = MR.
It has been shown with the help of table 2 and diagram 2.
From this table, it is clear that when output increases prices or AR remains the same i.e. Rs. 10.
In figure 2, on X-axis, we have measured
output and on Y-axis revenue. Average and
marginal revenue are horizontal lines which
are parallel to X-axis. It is a case under
perfect competition.
, 3. When both AR and MR are Straight Lines: Under imperfect competition, when AR falls,
MR also falls and it is always below AR line because there are large numbers of buyers and
sellers, products are not homogeneous and the firms can enter or exit the market. It can be shown
with the help of a table 3.
It is clear from the table that as price falls (AR falls) from Rs. 10 to Rs. 6, the total revenue (TR)
increases from Rs. 10 to Rs. 30 at a diminishing rate. MR also falls from Rs. 10 to Rs. 2, MR is
the rate at which the TR changes. It can also be drawn with the help of a Fig. 3.
In Fig. 3, AR and MR curves have been
shown. It shows when AR curve falls MR
curve also falls, and the MR curve will be
below the AR curve. But, this situation
exists only under monopoly and imperfect
competition.
4. When AR and MR are Convex: In fig.
5, AR and MR curves are convex to the
origin. It means as more and more units of a
commodity are sold, average revenue falls at
lower speed. MR curve also moves in the
same direction. The convexity shows that
MR falls but at a faster speed.
5. When AR and MR are Concave: The
figure 6 shows that if AR is concave to the
origin, MR will also be concave to the
origin. It means average revenue is falling at
a higher rate for each additional unit of a
commodity sold. Similar would be the case
for MR curve.
