REVENUE

In This Lecture…

Concepts of Revenue: Total, Average and Marginal Revenues

TR, AR and MR in Perfect Competition and Imperfect Competitions

Concepts and Conditions for Profit Maximization of Firms

Revenue

Revenue is the money payment received from the sale of a commodity.

Types of Revenue

1. Total Revenue2. Average Revenue3. Marginal Revenue

Total Revenue

TR is defined as the total or aggregate of proceeds to the firm from the sale of a commodity.

Symbolically,TR = P X Q

P = PriceQ = Quantity

Average Revenue

Average Revenue is the revenue per unit of output sold.

Symbolically,AR = TR

QOr, AR = P X Q

QOr, AR = P

AR is always identical with the price.

Marginal Revenue

Marginal Revenue is the revenue received by selling one extra unit of output.

ORMarginal Revenue is the addition made to total revenue when one more unit of output is sold.

MR = Change in Total Revenue Change in Quantity Sold

MR = ΔTRΔ Q

Also, MR n = TR n – TR n-1

Firm’s Revenue curves under Perfect Competition

It is a market situation where a firm is a price taker. There are so many buyers and sellers in the market that no individual buyer or seller can influence the price of a commodity. Any variation in the output supplied by a single firm will not affect the total output of the industry. No individual buyer can influence the price of the commodity by his decision to vary the amount that he would like to buy.

Price in perfect competition market is determined by the free play of the market demand and supply curve.

TR, AR, MR schedule under Perfect Competition

Here, AR=P=dAR=MR

Units sold

Price (P)

TR AR MR

12345

1010101010

1020304050

1010101010

1010101010

Graphical presentation of TR, AR, MR under Perfect

Competition Revenue TR 50

40

30

20

10 P=AR=MR=d

0 1 2 3 4 5 Quantity

Relationship between TR, AR, MR under Perfect

CompetitionTR is a straight positively sloping line

from the origin.TR increases in the same proportion as

increase in output sold.AR is horizontal line parallel to x-axis. It

coincides with the price line or the demand curve i.e. AR = P = d

MR is also a horizontal line parallel to x-axis. Since AR is constant MR is also constant. MR curve coincides with the AR curve such that P= d = AR = MR

Price Line and Total Revenue under Perfect

Competition Revenue

P A P1

0 X Quantity

TR is equal to the area under the price line. TR = price x quantity = OP x OX

= OPAX

Firm’s Revenue curves under Imperfect

Competition It is a market situation where a firm is a

price maker. In such a market a firm is able to sell more only by reducing the price of the product.

Price in imperfect competition market is determined by the firms itself.

TR, AR, MR schedule under Imperfect Competition

Here, AR=P=dAR≠MR

Units sold

Price (P)

TR AR MR

1234567

10987654

10182428303028

10987654

1086420-2

Graphical presentation of TR, AR, MR under

Imperfect Competition TR TR is

maximum TR

O Q AR/MR

MR=0 O MR AR

Q

Relationship between TR, AR, MR under Imperfect

CompetitionWhen TR increases at a decreasing

rate, MR is declining but has positive value.

TR is maximum when MR = 0TR starts to decline when MR is

negative.The rate of fall in MR is twice to

that of AR.

Profit Maximization for Firms

A producer is said to be in equilibrium when he produces the level of output at which his profits are maximum.

It is a situation of profit maximization.

Profit Maximization Conditions for Firms

A primary objective of a producer is to earn maximum profits.

Profits is the difference between total revenue and total cost.

π = TR - TCProducer is in equilibrium at that

level of output at which he is earning maximum profits i.e. the difference between TR and TC is maximum.

The producer is in a “state of rest”.

Profit Maximization Conditions for Firms with

TC and TR CurvesProfits are maximum where the

following two conditions are satisfied.1. The vertical distance between TR and

TC is maximum.2. Profits fall if one more unit of output is produced.

Break-even Point : It is the point where TR=TC or AR=AC; profits are zero and losses are zero. This is also known as producer earning normal profit.

Profit Maximization Conditions for Firms with

TC and TR Curves TC TR / TC TR

O XA X XB Output π π is maximum

At XA and XB π is zero. No-

profit-no-loss points

O XA X XB Output

Profit Maximization Conditions for Firms with

MR and MC CurvesProfits are maximum where the

following two conditions are satisfied.1. MR=MC2. MC curve must be rising

Profit Maximization Conditions for Firms with

MR and MC Curves MC MR / MC

MR

O XA X XB Output π π is maximum

At XA and XB π is zero. No-

profit-no-loss points

O XA X XB Output

Profit Maximization Conditions for Firms with

MR and MC Curves MC MR / MC

MR

O XA X XB Output π π is maximum

At XA and XB π is zero. No-

profit-no-loss points

O XA X XB Output

Profit Maximization Conditions for Firms with TR /

TC MR / MC Curves TR/TC TC

TR

O X1 X X2 Output

π

O X1 X X2 Output

MR/MC MC

MR O X1 X X2 Output

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