Revenue Analysis

Revenue denotes the amount of income, which a firm receives by the

sale of its output. The revenue concepts commonly used in economics
are total revenue, average revenue and marginal revenue.
Total Revenue
Total revenue refers to the total sale proceeds of a firm by selling its
total output at a given price.
Mathematically TR = P x Q
TR = Total Revenue, P = Price, Q = Quantity sold.
Suppose a firm sells 100 units of a product at the price of $5 each, the
total revenue will be 100 $5 = $500.
Average Revenue
Average revenue is the revenue per unit of the commodity sold. It is
obtained by dividing the total revenue by the number of units sold.
Mathematically AR = TR/Q
Example: average revenue is = 500/100 = $5. Thus, average revenue
means price.
When TR = Rs.100 is received from selling of 10 units of the
product, the AR = Rs.10.
If seller sells various units of a product at the same price then
AR = PRICE.
When he sells different units of his product at different prices,
then the AR is not equal to PRICE.
Suppose seller sells the 2 units of product, one unit to the
consumer A at price Rs.5 and one unit to the consumer B at
price 7. Then AR = 12/2 = 6. Thus, 2 units sold out for different
prices, AR is not equal to price.

Marginal Revenue
Marginal revenue is the addition to total revenue by selling one more
unit of the commodity.
MRn = TRn TRn-1; where MRn = Marginal revenue of the nth unit
TRn = Total revenue of n units
TRn-1 = Total revenue of n-1 units
n = Any given number of units sold.
Suppose 5 units of a product are sold at total revenue of $50 and 6
units are sold at a total revenue of $60. The marginal revenue will be
$60 - $50 = $10. It implies that the 6 th unit earns an additional income
of $10.
The relationship among total, average and marginal revenues under
imperfect competition can be explained with the help of a table given
below:

Exactly the same information is given by the total revenue (TR),

average revenue (AR) and marginal revenue (MR) curves in Fig. 2.20.
These curves have been plotted from the figures in Table 2.5.

1. We notice that AR curve is downward sloping, i.e., as price (or AR)

falls, quantity demanded and sold increases.

2. It can be observed from Table 2.5 and Fig. 2.20 that when AR
falls, MR curve lies below it. It means that MR declines at more
rapid rate than AR.

3. Each additional unit sold adds less to the price received for it. It is
evident that at all prices, MR is smaller than AR (price), given that
Qn and (P Pn+1,) are positive. This is clear from the figures given
in the table.

4. We observe that with the increase in sales, price falls and

marginal revenue is less than the price (or AR). That is why, the
MR curve lies below the AR curve and declines at a faster rate.

5. It may be further observed that so long as the TR is increasing,

MR is positive. MR is positive for the first five units. Thus, TR
curve starting from the origin continues to increase upto five
units. TR does not change between fifth and sixth unit.

6. When TR is unaffected by the increase in quantity, MR is equal to

zero. TR is maximum corresponding to zero MR at the sixth unit.
Beyond sixth unit, TR falls and MR becomes negative. MR of the
seventh unit is 2 and that of eighth unit are 4. Thus, while AR
is always positive. MR can be positive, zero or even negative.

The relationship among TR, AR and MR can be summarised as

follows:
(i) TR increases at a diminishing rate with increase in the units of
output, MR is positive and is downward sloping.
(ii) When TR is maximum, MR becomes equal to zero.
(iii) MR becomes negative, when TR decreases with increase in the
units of output.
(iv) MR falls with the fall in AR, but, the rate of decrease in MR is much
higher than that in AR.
(v) MR may be positive, negative or zero, but AR is always positive
(since negative price is absurd)

The above relationship holds true in case of all forms of

imperfect competition that is, monopoly, duopoly, oligopoly,
monopolistic competition, etc. Under imperfect competition, as
a firm lowers the price, the quantity demanded goes up and
average revenue curve slopes downward as a result.
Under Perfect competition
Under perfect competition, a very large number of firms are assumed
to be present.
The collective forces of demand and supply determine the price in the
market so that only one price tends to prevail for the whole industry.
Each firm has to take the market price as given and sell its
quantity at the ruling market price. In simple terms, the firm is
a price-taker and the firms demand curve is infinitely elastic.
As the firm sells more and more at the given price, its total revenue will
increase but the rate of increase in the total revenue will be constant,
since AR = MR.
Q
1
2
3
4
5
6
7

P
10
10
10
10
10
10
10

TR
10
20
30
40
50
60
70

AR = P MR
10
10
10
10
10
10
10
10
10
10
10
10
10
10

In figure 1, OX axis represents the number of units sold and OY axis

represents the price per unit. The price of the unit remains constant at
P1. Consequently AR and MR curves coincide with each other.
Forms of Market
A market must have following features:
Buyer and Sellers: The number of producers and consumers present
in the market.
Commodities: Goods and services being offered.
Communication:
The quantum of freely available information.
Place or Area: There must be area or place where buyers and sellers
interact with each other
The major market forms are:
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

 Duopoly

The above market forms are classified based on the following

criteria:
Number of Sellers
Similarity of products
Availability of information
Mobility of firms
PRODUCER EQUILIBRUIM CONDITION
A producer is said to be in equilibrium when he produces the level of
output at which his profits are maximum.
1. MR = MC

The firm is at equilibrium when MR = MC.

2. In the short-run, P AVC at equilibrium output. In the
long-run, P AC at equilibrium output.
Shut Down Point
Shut Down or Close Down situation occurs when the price is critically
low that it cannot cover the fixed costs at all. The revenue just covers
variable costs. The price line passes through the minimum point of the
AVC curve.
If TR > STVC firm will minimizes losses by operating

If TR < STVC firm minimizes losses by shutting down

If p > SAVC (p < SAVC)
Firm will minimize losses by continuing to operate (shutting
down)

PERFECT COMPETITION
The concept of perfect competition was first introduced by Adam
Smith in his book "Wealth of Nations". Later on, it was improved by
Edgeworth. However, it received its complete formation in Frank
Knight's book "Risk, Uncertainty and Profit" (1921).
Examples of markets in perfect competition are extremely rare.
Numerous markets in the retail, service and agricultural sectors
approach perfect competition best. But, in the agricultural sector,
government support price programs distort the market mechanism.