REVENUE

Q) What is Revenue? A) Revenue is the money receipts from the sale of the product. Q) What is Total Revenue (TR)? A)Total Revenue is defined as the total money receipts of the firm from the sale of the
total output during a given period. It is calculated by multiplying the total units of a commodity sold with the per unit price of the commodity. For example, if a firm sells 10 pens at the price of Rs. 20 per pen. The total revenue will be equal to 10 x Rs. 20 = Rs.200. TR = TQ x P (TR = Total Revenue; TQ = Units sold; P \ Price). Total Revenue is illustrated with the help of a schedule and diagram as shown below : Units Price TR 1 10 10 2 9 18 3 8 24 4 7 28 5 6 30 6 5 30 7 4 28 The TR schedule and curve show as the firm sells more units, its TR increases, then it becomes constant and later it declines. The reason is that when a firm sells more, its price declines.

Q) Define Average Revenue (AR)? A) Average Revenue is the revenue per unit of commodity sold. AR is calculated by
dividing the TR by the number of units sold. For example, if the TR of a firm from sale of 10 pens is Rs. 200, AR will be equal to 200/10 = Rs. 20. Average revenue is the same thing as price. In Economics, the terms AR and price are usually inter-changeable. TR equals price multiplied by units sold and AR equals. TR divided by units sold. Thus, price equals AR as proved below : Pr ice Units sold TR AR = = = Pr ice Units sold Units sold Units TR AR 1 10 10 2 18 9 3 24 8 4 28 7 5 30 6 6 30 5 Average Revenue is illustrated in the above AR schedule and average revenue curve.

The AR schedule and diagram show that AR falls with additional units sold. AR curve is also called the firms demand curve.

Q) What is Marginal Revenue (MR)? A) Marginal Revenue is the addition to the total revenue by selling an additional unit of
a commodity. For eg. suppose a firm earns a TR of Rs. 20 by selling 4 pens and Rs. 24 by selling 5 pens. In this case Rs. 4 (Rs. 24 Rs. 20) is the MR which is addition to the TR (Rs.20) by selling an additional unit (5th pen) of output. MR = TRn TRn1 (OR) MR = TR / Q (Q = Change in quantity). The concept of MR is explained with the help of MR schedule and MR curve. Units Price TR MR 1 10 10 10 2 9 18 8 3 8 24 6 4 7 28 4 5 6 30 2 6 5 30 0 7 4 28 -2 The above schedule and curve show that MR curve declines when the firm sells more units.

Q) Show the relationship between TR, AR and MR. A) Total Revenue is defined as the total money receipts of the firm from the sale of the
total output during a given period. Average Revenue is the revenue per unit of commodity sold. Marginal Revenue is the addition to the total revenue by selling an additional unit of a commodity. The relationship between TR, AR and MR is illustrated with the help of the following table and diagram. Units Price TR MR 1 10 10 10 2 9 18 8 3 8 24 6 4 7 28 4 5 6 30 2 6 5 30 0 7 4 28 -2 I. (i) (ii) (iii) (iv) Relationship between TR and MR : TR is the summation of MRs (TR = MR1 + MR2 + . MRn) TR = MR at the first unit As long as MR is positive, TR rises. When MR = 0, total revenue becomes constant and at its maximum or peak.

(v) II. (i) (ii) (iii) (iv)

When MR becomes negative, TR declines and the slope of the TR curve becomes negative. Relationship between AR and MR : AR = MR at the first unit. Both have been derived from TR (AR = TR / Units; MR = TRn TRn1) When AR declines, MR also declines but the fall in MR is steeper. Hence MR curve is below AR curve. MR can become zero and negative but AR can never become zero because TR can never become zero and AR/price cant become 0.

Q)Explain with the help of diagrams the relationship between AR and MR (OR) Comment on the nature of AR and MR curves under perfect competition and imperfect competition. A) Average Revenue is the revenue per unit of commodity sold.
Marginal Revenue is the addition to the total revenue by selling an additional unit of a commodity. (i) When AR is constant, MR is also constant and AR becomes equal to MR : This happens under perfect competition where the industry is the pricemaker and a firm is the price-taker. A firm has to accept the price as given (or fixed by the industry). At this price a firm can sell any amount of the commodity. Hence MR is equal to AR (price) under perfect competition. Consequently, AR and MR curves coincide in a horizontal line parallel to the OX-axis as shown in the below diagram: Units TR AR MR 1 10 10 10 2 20 10 10 3 30 10 10 4 40 10 10 5 50 10 10 (ii) When AR falls, MR also falls but the fall in MR is faster. Hence, AR >MR : This happens in case of imperfect competition/monopolistic competition where the firm is a price-maker. If the firm wants to sell more units of a commodity, it has to reduce the price. As a result AR and MR curves of the firm become downward sloping. MR curve lies below the AR curve as shown in the below table and diagram. Units TR AR MR 1 10 10 10 2 18 9 8 3 24 8 6 4 28 7 4 5 30 6 2

(iii) Units 1 2 3 4 5

When AR rises, MR also rises but the rise in MR is faster. Hence MR curve is above AR curve as shown in the below schedule and diagram. TR AR MR 10 10 10 22 11 12 36 12 14 52 13 16 70 14 18

Q) Explain Break-even-point / Break-even-price. A)The effort of a firm is always to avoid losses and earn profit. Firms profit or loss
depends on the total revenue total cost relationship. If the TR < TC, firm will incur losses and if the TR > TC, the firm will earn profits. A schedule showing firms cost schedules and revenue schedules at various levels of output is called break-even chart. The chart acts as an important tool for making business decisions. Units 0 100 200 300 400 TFC 100 100 100 100 100 TVC 0 50 100 150 200 TC 100 150 200 250 300 AVC 0 0.50 0.50 0.50 0.50 AC 1.50 1.00 0.83 0.73 AR/P 1.00 1.00 1.00 1.00 TR 0 100 200 300 400 Profit/ Loss Loss Loss B.E.P. Profit Profit

The break-even point is the point where the firms TR and TC are equal. In other words, the break-even point indicates the level of output at which AR = AC. At this point, the firm has neither super normal profit nor loss. In other words, the firm gets only normal profits which is included in TC. Normal profit is the minimum profit which a firm must get to remain in production. Thus break-even point imply zero-profit. In the figure E is the break-even point. A position below this point indicates losses where as a position above this point shows excess or super-normal profits. In the short-period, a firm may operate below the Break-even-point with losses because it is able to recover its variable cost. But in the long-period, a firm must be at break-even point. However, in the long-run, no firm can remain above the break-even point for long since excess profit will be competed away by the free entry of new firms in the industry.

Q) What is shut-down point? A) During short-period, a firm will continue production even if it has to incur losses
equal to fixed costs. This is so because in case the firm stops production, it has still to incur losses equal to fixed costs. In other words, a firm does not stop producing a

commodity produced it recovers at least variable costs. However, if market price falls further and the firm is not able to recover even variable costs, production is stopped. This situation is technically characterized as shut-down. At the shut down point, the firms AVC > AR / Price.

Q) Show the relationship between TR, AR and MR under perfect competition. A) Total Revenue is defined as the total money receipts of the firm from the sale of the
total output during a given period. Average Revenue is the revenue per unit of commodity sold. Marginal Revenue is the addition to the total revenue by selling an additional unit of a commodity. Units TR AR MR 1 10 10 10 2 20 10 10 3 30 10 10 4 40 10 10 Under perfect competition, industry fixes the price by the forces of demand and supply. All the firms take the same price. Hence, a firm under perfect competition is price taker. A firm can sell any quantity at the given price. The firms price / AR is constant. MR also becomes constant and AR becomes equal to MR. Both AR and MR curves coincide and are parallel to OX-axis. TR increases at constant rate since Price/AR is constant. TR becomes a straight line. The relationship between TR, AR and MR is shown with the help of a table and diagram.