Producers Behavior- Revenue

 CONCEPT OF REVENUE

Definition: The revenue of a firm is its sale receipts or money receipts from the sale of a product.

Revenue is estimated in different ways as:

1. Total Revenue                  2. Marginal Revenue             3. Average Revenue

1. Total Revenue: Total money receipt of a firm from the sale of a given output is called total revenue. 

Total Revenue = Price of the output × total quantity of output sold

TR = P × Q

2. Marginal Revenue: Marginal Revenue is the change in total revenue when one more unit of a commodity is sold. Also, sum total of MR corresponding to ech unit of output is equal to TR. 

MR= TR_n- TR_n-1                 

OR             

Marginal Revenue (MR) = Change in Total Revenue/ Change in Quantity

3. Average Revenue: Average Revenue refers to revenue per unit of output. Average revenue is the same as the Price of the commodity.

Average Revenue (AR) = Total Revenue/ Quantity 

Or 

Average Revenue = Price 

Diagrammatic Illustration of AR, MR and TR:                    When Price is NOT Constant

Output	AR= Price	TR	MR
1	10	10	10
2	9	18	8
3	8	24	6
4	7	28	4

Note the following in the above table:

(i) In case AR is declining, MR is also declining

(ii)  When AR is declining by 1, MR is declining by 2. This shows that in such markets where prices are not constant (monopoly or monopolistic competition markets), MR declines faster than AR. So, that AR>MR 

(iii) When MR is declining, it means that TR is increasing at a decreasing rate. It means less and less is being added to the total revenue for every additional unit of output

TR, AR, MR Curves under imperfect competition

Estimation of TR, AR and MR, and their Relationship: A Snap Shot

Estimation:

(i) TR= AR × Q Or Sum of MR

(ii) AR = TR/Q

(iii) MR= TR_n – TR_n-1

 

Relationship between TR and MR

(i) When TR is increasing at constant rate, MR should be constant. It happens under perfect competition.

(ii) When TR is increasing at diminishing rate, MR should be diminishing (a situation of monopoly or monopolistic competition)

(iii) When TR is maximum, MR is Zero

(iv) When TR is diminishing, MR is negative.

 

Relationship between AR and MR

(i) When AR is decreasing, MR should be decreasing faster than AR. Thus, downward sloping MR curve is below the downward sloping AR curve. . Accordingly, MR < AR. (a situation of monopoly or monopolistic competition)

(ii) If AR is constant, MR is equal to AR. Both are indicated by the same horizontal straight line.  (a situation of perfect competition)

(iii) MR can be negative, but not AR.