concepts of revenue
meaning of revenue or sale proceed
by selling the commodity what ever money is received by the firm is called revenue.
suppose you are running a factory producing chocolates. you produce 1000 chocolates daily. by selling these chocolates you get RS 2,000. in economics , this amount of rs 2,000 is called revenue. thus, by selling a commodity whatever money a firm receives is called revenue.
or
revenue is the money received from sale of commodity.
difference between revenue and profits?
revenue and profits are different concepts
the concept of revenue is different from the concept of profit .
the following equations shows the difference:-
profit = revenue - cost
revenue = costs + profit
concepts of revenue
i) TR ( total revenue)
ii)AR (average revenue)
iii)MR (marginal revenue)
i) total revenue (TR) :-
a revenue that a firms get by selling a given amount of output that is called total revenue.
TR = P*Q
TR = TOTAL REVENUE
P = PRICE PER UNIT
Q = QUANTITY SOLD
or
TR =SUMMATION OF MR
TR = TOTAL REVENUE
MR = MARGINAL REVENUE
marginal revenue ( MR)
it is change in total revenue as a result of selling an additional unit of output is known as marginal revenue. however it can be positive, zero nd negative.
MRn =TRn - TRn-1
MRn = marginal revenue of n units
TRn = total revenue of n units
TRn-1 = total revenue of n-1 units
or
example
P Q TR = P*Q MR
5 1 5 5
4 2 8 3
3 3 9 1
2 4 8 -1
1 5 5 -3
MR2 =TR2 - TR1
= 8 - 5
= 3
average rvenue
it is the revenue per unit of output. it is obtained by dividing T. R with the quantity sold . AR is equal to price.
AR = Average revenue
TR = Quantity sold
Q TR AR = TR/Q
1 10 10
2 20 10
3 30 10
4 40 10
Q4 show that AR = price ?
Ans. we know that
AR = TR/Q
we also known that TR = P ( where P = quantity or output sold)
relating the two equations we write that;
AR = P*Q/Q = P
thus it is proved that AR = price
Q5 Firm's demand curve or price line is the same as AR curve ?
ans. firm's demand curve or price line is the same as firm's AR curve, because AR means price\, and demand curve ( or Ar curve ) shows the relationship between price and quantity demanded of firm's output.
Q^ what is relationship between TR, AR and MR under perfect competition ?
Ans. perfect competition is a market in which there are large number of buyers and sellers where as in this market product produce is homogonous and there is free entry and exit of firms .
in such a market price of commodity is determined by industry and firm followed that price A firm can sell any amount of commodity at this price.
price Q TR = P*Q MR AR = TR/Q
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
!. it is clear from diagram MR is constant so TR is increasing at constant rate therefore TR is in a straight line moving upward.
2. AR and MR are equal to each other and it is shown by horizontal straight line where as AR = MR because industry is a pric maker and firm is price taker.
Q7 prove that area under AR & MR curve is equal to Tr in case of perfect competition ?
Ans. in case of perfect competition AR is constant therefore AR = MR. AR curve is horizontal line which represents the value of different level of output at uniform prove.
in the diagram, price ( equal to OP) is constant and output is equal to OQ.
TR = P*Q
= OP*OQ
Area = OPRQ
Q8. what is relationship between TR,AR and MR?
Ans. the relationship between TR,AR and MR can be explained with the help of diagram.
p Q TR MR AR
10 1 10 10 10
9 2 18 8 9
8 3 24 6 8
7 4 28 4 7
6 5 30 2 6
5 6 30 0 5
4 7 28 -2 4
3 8 24 -4 3
2 9 18 -6 2
1 10 10 -8 1
1. when MR is positive then TR is increasing as in the diagram upto point K, MR is positive. so, TR is increasing upto point E1.
2. when MR is zero then TR is maximum as in the diagram at point K, MR is 0 and TR is maximum at point K'
3. when MR is negative then, TR is falling as after point k, MR is negative and TR is falling. after point K'.
4. both AR and MR are decreasing but MR is falling at faster rate. so, MR is below than the AR.
5. MR can be negative but TR and MR cannot be.
6. both TR ad MR can be calculated from TR.
(a) MR = TRn - TRn-1
(b)AR = TR/Q
Q9 can MR be zero or negative ?
Ans. Yes, MR can be zero or negative. it is clear from the following illustrations;
Average revenue output (units) total revenue marginal
price (Rs.) (Rs.) revenue (Rs.)
100 1 100 100
80 2 160 60
40 3 160 0
30 4 150 -10
1. MR can be zero or even negative, but only when price is declining as under monopoly or monopolistic competition.
2. TR stops increasing when MR = 0 so that TR is maximum when MR = 0.
3. TR starts declining, less and less added to TR is every additional unit is sold. accordingly, TR increases only at the diminishing rate.
Q10 what is firm's price line/ what is its shape?
Ans. firm's price line is the same as firm's AR curve. under perfect competition, firm's price line is a horizontal straight line. both AR and MR tend to coincide (AR=MR). under monopoly or monopolistic competition, firm's price line slopes downward. when AR sloped downward, MR also slopes downward, MR<AR.
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