03/05/2023

ANALYSIS OF REVENUEProf. Prabha Panth

Osmania University,Hyderabad

3 May 2023 Prabha Panth

03/05/2023

REVENUE The earnings of a firm, are called its

Revenue. It equals Quantity sold into the Price of the

product: Total Revenue TR = P × Q When a firm sells more output, given price,

its TR increases. Thus total revenue increases with sales.

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Revenue and Market structure TR = P × Q But P fixation depends on the market. Different markets have different types of P

fixation .1. In Perfect Competition, the market determines

P, and all firms have to sell at this P. Uniform P.2. In Imperfect Markets (monopoly, oligopoly and

monopolistic competition), P is fixed by individual firms.So P need not be the same for all firms in such markets.

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Revenue in Perfect Competition In Perfect Competition, P is determined by the

market D and S. All firms here have to sell at the same P. At this P there is infinite D for its product. If any firm increases P, then it loses its

customers to other firms, There is no need to lower P, as there is infinite

D at the given P. Therefore in the short run, P remains constant

in P.C. ceteris paribus4Prabha Panth

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Total Revenue - P.C firmP (Rs) Q (kgs) TR= P×Q

(Rs)

10 0 0

10 1 10

10 2 20

10 3 30

10 4 40

10 5 50

10 6 60

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Total Revenue – P.C firmR

0 q

TR=P×qAs P is constant, increase in q, leads to increase in Total Revenue.TR is thus a straight line through the origin.

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Average and Marginal Revenue Average Revenue AR = TR/Q

AR = TR = P × Q = P Q Q

So AR = P. The AR curve shows the relationship between P

and Q.Therefore it is also the demand curve of the firm.

Marginal Revenue MR = change in TR due to change in Q.

MR = ∆TR ∆Q

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TR, AR and MR in Perfect CompetitionP (Rs) Q (kgs) TR= P×Q AR = TR/Q MR =∆TR/∆Q

10 0 0 0 0

10 1 10 10 10

10 2 20 10 10

10 3 30 10 10

10 4 40 10 10

10 5 50 10 10

10 6 60 10 10

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TR, AR and MR - PC firmR

q0

TR=P×q

P =10 AR=MR = d

When q=0, P=10, and remains constant, as q increases.AR = MR = P for a perfectly competitive firm.A straight line parallel to X - axis.

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Price in Imperfect Competition In imperfect markets – monopoly,

oligopoly and monopolistic competition, the firm is free to fix its own P.

There is no market P, but individual Ps. To sell more the firm has to lower its P. Therefore the AR curve will be sloping

downwards. TR will not increase continuously, but

will dip downwards after a maximum.

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Revenue in Imperfect CompetitionP (Rs) Q (kgs) TR= P×Q AR = TR/Q MR =∆TR/∆Q

10 1 10 10 10

9 2 18 9 8

8 3 24 8 6

7 4 28 7 4

6 5 30 6 25 6 30 5 04 7 28 4 -23 8 24 3 - 4

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TR, AR and MR in imperfect competition

R

0q

TR

AR = d

TR max

MR

TR is an inverted U-shaped curve.AR is downward sloping.MR is also downward sloping.It lies below AR, cuts X-axis when TR is maximum,And then becomes negative.

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Equilibrium of the firm

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Equilibrium of the firm How much of output should the firm

produce and sell? As Q increases, TR, but TC also . A rational firm tries to maximise its profits,

or minimise loss. Assuming that cost curves are given,

Profit = TR – TCThis refers to all types of markets, Perfect

and Imperfect.14Prabha Panth

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Equilibrium of the firm - PC

R, C

0 q

TRTC

A

q1

B

q2

Loss, TC

> TR

Profit,

TR >TC

Loss

, TC >T

R

R

C

q3

Max Profit

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Equilibrium of the firm - PC As Q increases, TR and TC both increase. Up to point A, TC > TR, so the firm runs at a loss. At A, TC = TR, this is called the “break even”

point of the firm, profits = 0. Beyond A, TR >TC, so the firm makes profit, till

point B. At point B, again the firm makes zero profits, as

TC = TR. After B, TC > TR and the firm makes losses. This

is the uneconomical zone of production.

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Equilibrium of the firm - PC How much of output should the firm produce to

make maximum profits? This will lie between points A and B. The output that fetches it maximum profit, is the

point where the difference between TR and TC is the maximum,

To find this point, draw a tangent to the TC curve that is parallel to TR curve.

This point (q3) gives the maximum profit (R-C). This is a unique point, as no other level of output

will give the firm maximum profit.17Prabha Panth

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Equilibrium in Monopoly (imperfect market) The same principles of profit maximisation

applies in all imperfect markets. Taking monopoly as an example, The shape of the TR curve is different in

monopoly, It is an inverted U-shaped curve. Assuming that TC curve has the same

shape, profit maximising output has to be decided.

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Equilibrium - Monopoly firm

0

R

q

TR

TC

A

q1

B

q2

Loss, TC

> TR

Profit, T

R >TC

Loss

, TC >T

Rq3

R

CMax Profit

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Profit Maximisation - Monopoly Firm At A and B, the firm makes no profit, as TR =

TC. As in PC, the maximum profit is the largest

distance between TR and TC. This is found at the output where the slope of

the TR = slope of TC. Shown by drawing tangents to the two curves,

and locating that point where the two tangents are parallel.

Profit maximising output = q3.20Prabha Panth

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Profit Maximising Conditions For all types of firms, profit maximising output is fixed at the point

where:1) Slope of TR = slope of TC.Slope of TR = MR, and slope of TC = MC.So for profit maximisation, the first condition is that MC = MR.But there could be more than one point where this will occur.2) The second condition for profit maximisation is that the rate of

increase in MC > rate of increase in MR.That is MC should be rising while MR should be falling. So an extra unit of output adds more to TC than to TR, making it

unprofitable to increase output. Thus the two conditions for determining the profit maximising output of a

firm are:1. MC = MR, and 2. MC should cut MR from below.

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Questions1. Short answer questions:

a) What is “revenue”? How does it differ from Price and Cost?

b) What is the shape of the TR curve of a perfectly competitive firm? Illustrate.

c) What are AR and MR? How are they derived?2. Essay questions:

a) Depict TR, AR and MR of a monopoly firm in a diagram. What is the reason for their respective shapes?

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b) What are the two conditions of profit maximisation? Illustrate with a diagram.

c) How does a firm in P.C achieve maximum profits? Show with the help of a diagram.d) With the help of a diagram show how a monopoly firm achieve maximum profits?

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