Concepts of The Revenue . Revenue. The Revenue of the firm is its sale receipts or money receipts from the sale of a product. It is also called sale proceeds.
1)Total Revenue, 2)Marginal Revenue, 3)Average Revenue
Total Revenue: The revenue that the firm gets by selling a given quantity of product is called Total Revenue. If 100 Ice- Cream slabs are sold at the rate of Rs. 50 per slab, total revenue (TR) of the firm will be
100 Rs.50 5,000
Quantity Price Total Revenue
MR = Change in Total Revenue = TR
Change in Quantity Sold Q
MR TRn TRn-1
Average Revenue: Average revenue refers to revenue per unit of output sold. If, TR =Rs.1,000, and Q =100, then
AR = TR 1,000 = Rs.10
Thus, AR refers to the rate at which output is sold. Accordingly AR is nothing but price of the product.
1). TR = AR x Q = Rs.10 x 5 = Rs.50
2). AR = TR / Q = Rs. 50 / 5 = Rs.10 Price
3). MR = TR(n) – TR(n-1) = Rs.50 - Rs.40 = Rs.10
That if AR is constant MR = AR
Relationship between Total Revenue, Marginal Revenue and Average Revenue
Relationship between Total, Average and Marginal Revenue, A Diagrammatic Illustration
(3) If both Average Revenue and Marginal Revenue curves are straight lines: In this situation MR curve will be mid-way between AR curve and OY-axis. It implies that AB=BC. This situation relates to Monopoly and Imperfect Competition.
(4) If both Average Revenue and Marginal Revenue Curves are Convex: In Fig. average revenue curve and marginal revenue curve are shown as convex to the point of origin. In this situation, marginal revenue curve will intersect a horizontal line drawn from any point on average revenue curve to OY-axis, at a point (B) which is situated at less than the mid point. It means that marginal revenue curve will be nearer to OY-axis than average revenue curve, i.e., AB is less than BC.
(5) If both Average Revenue and Marginal Revenue Curves are Concave: Average revenue and marginal revenue curves shown in fig. are concave to the point of origin. In this case, marginal revenue curve will intersect any perpendicular drawn from any point on AR curve to OY-axis, at a point farther away from the mid-point.
(6) Relation of Average Revenue and Marginal Revenue and Elasticity of Demand: In case of monopoly, average revenue and marginal revenue curves slope downward. It means at different points on the average revenue curve, elasticity of demand is different. Relationship between average revenue and marginal revenue can also be known on the basis of elasticity of demand. It may be noted that average revenue curve of a firm is also its demand curve.
Revenue Curves under Monopoly: Fig. represents average and marginal revenue curves under monopoly. Both curves are sloping downwards. It implies that in order to sell more units, the monopolist will have to lower the price per unit (average revenue).
In case of pure monopoly, average revenue curve may be rectangular hyperbola. Under pure monopoly, a producer can be so powerful that by selling his output at different levels he can obtain the entire income of the consumer. In this case average revenue curve is a rectangular hyperbola. It means the total revenue of the monopolist will remain the same, whatever the price he may fix for his products.
Revenue Curves under Imperfect Competition: Imperfect competition has different forms, e.g., monopolistic competition, oligopoly etc. Revenue curves under these market conditions slope downward.
Different concepts of revenue have the following significance in price analysis:
Estimate of Profit and Loss: A firm makes use of the concept of average revenue to calculate profit and loss. Whether a firm will earn profit or incur loss by selling its products depends on the relation between its average revenue and average cost. If average revenue is greater the average cost(AR>Ac), the firm will earn supernormal profit. If average revenue is less than average cost (AR<AC), the firm will suffer loss. If average revenue is equal to average cost(AR=AC), the firm will earn normal profit.