Concept of Revenue
Concept Of
Revenue
Revenue
is the amount of money received by a firm by the sale of its output in the
market or we can say that the payments received by an entrepreneur from the
sale of the goods produced is known as revenue.
If the firm sells 100 pens at the price of Rs.10 each during a week, his total revenue
during
that
week equals Rs. 10 × 100 = Rs. 1,000.
Revenue=
Cost+Profit
There
are three concepts of revenue- Total revenue, Marginal revenue, Average revenue.
Total Revenue
Total
Revenue refers to the total amount of money received by a firm from the sale of
its products produced over a given period of time.
By
selling 1,000 units of a pen at the rate of Rs.10 each, the total revenue a firm receives
is 1,000 ×Rs 10 = Rs. 10,000.
Thus,
TR =
Q × P,
where
Q is the total quantity sold and P is the price per unit.
Average Revenue
Average
revenue is obtained by dividing total revenue received by the total number of
units sold by a firm. It refers to revenue per unit of output sold. Different
units of a commodity are sold at the same price, in the market, average revenue
is equal to the price at which the commodity is sold. The consumer’s demand curve shows
the graphic relation between price and the amount demanded, it also represents
the average revenue or price at which the various amount of a commodity is
sold because the price offered by the buyer is the revenue of the seller.
Thus, the average revenue curve of a firm is really the same thing as the demand curve
of the consumer.
Symbolically,
AR=
TR/Q
Where
TR= Q x P
So,
AR= Q x P / Q
Thus,
AR=P
Marginal Revenue
Marginal
revenue is the net increase in total revenue resulting from selling one more
unit of a product. In other words, it is the additional revenue earned by a
producer by selling an
additional
unit of his product.
MR =ΔTR/ ΔQ
Where ΔTR
represents a change in TR
ΔQ represents a change in the total quantity sold.
Or,
MR = TRn – TRn-1
Where,
TRn is the current or selected value of total revenue and TRn-1 is the previous
value of total revenue.
For example, the TR of selling four-unit of a
product is Rs. 50 and TR of selling five-unit is Rs. 56, then TRn and TRn-1 are
56 and 50 respectively. Thus, MR = 56– 50 = 6.
It means,
by selling one more unit the seller gets additional revenue of Rs. 6.
Relationship
between TR, AR, and MR under different market conditions
-
Under Perfect Competition: Under
perfect competition, the market price is determined by the interaction between
demand and supply and a firm can sell any amount of outputs at the existing
market prices.
A firm cannot influence the market price by its own
action. In this case, when the Average Revenue Curve is a horizontal line, the marginal Revenue Curve coincides with the Average Revenue Curve. This is so
because the commodity’s market price is constant.
-
We can prepare a hypothetical revenue schedule in order
to understand the relationship between TR, AR, and MR.
-
|
Number of units sold |
TR
(Rs.) |
AR and
P (Rs.) |
MR
(Rs.) |
|
1 |
10 |
10 |
10 |
|
2 |
20 |
10 |
10 |
|
3 |
30 |
10 |
10 |
|
4 |
40 |
10 |
10 |
|
5 |
50 |
10 |
10 |
|
6 |
60 |
10 |
10 |
|
7 |
70 |
10 |
10 |
The relation between AR and MR
Thus it is clear that under perfect competition, the AR curve
will be a horizontal line and parallel to X-Axis.
MR curve also coincides with the AR curve because a firm
has to sell each unit of its product at the constant existing market price.
Total revenue increases at a constant rate under perfect competition.
-
Under Imperfect Competition: under
imperfect Market, firms are not
price takers and hence, have some control over the pricing of their goods
and services.
-
We can prepare a hypothetical revenue schedule in order
to understand the relationship between TR, AR, and MR.
-
|
Number of units sold |
TR
(Rs.) |
AR
(Rs.) |
MR
(Rs.) |
|
1 |
20 |
20 |
20 |
|
2 |
36 |
18 |
16 |
|
3 |
48 |
16 |
12 |
|
4 |
56 |
14 |
8 |
|
5 |
60 |
12 |
4 |
|
6 |
60 |
10 |
0 |
|
7 |
56 |
8 |
-4 |
From the table and diagram, it is clear that:
·
TR increases as more units sold, but at a diminishing
rate.
·
AR and MR both fall, but the fall in MR is greater than
the fall in AR i.e. MR falls more steeply than AR.
·
TR is the highest when MR is zero.
· TR also falls when MR becomes negative.
Under imperfect competition, the AR and MR curves of an individual firm are downward sloping and the MR curve is below AR. When the price falls as indicated by the declining AR curve, the MR must always be less than AR, because the falling price must mean some loss on the sale of additional supply. That is why the MR curve lies below the AR curve.
Very nice and helpful. Thanks Mam.
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