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REVENUE CURVE

By: -
Pawandeep Kaur
Maninder Singh
What is revenue?
By selling a commodity whatever money a firm receives is
called revenue.

In words of Dooley, “The revenue of a firm is its sales


receipts or money receipts from the sale of a product.” It is
also called sale proceeds.
Revenue and profit are different
concepts

The following equation shows the difference: -

Profit = Revenue – Cost


or
Revenue = Cost + Profit
Variants of revenue

1) Total revenue (TR)

2) Marginal revenue (MR)

3) Average revenue (AR)


Total revenue (TR)
The revenue that a firm gets by selling a given output is total
revenue.
For example, If 100 ice creams slabs are sold at the rate of Rs 50
per slab, TR of the firm will be:
Output * Price = Total revenue
100 * Rs 50 = Rs 5000
Total revenue is total money receipts of a producer
corresponding to a given level of output.
Or,

TR = AR * Q (Here, TR = Total revenue


AR = Revenue per unit of output
Q = Total output )
Marginal revenue (MR)
Marginal revenue is the total revenue which results from
the sale of one more (or one less) unit of commodity.
In order to calculate the MR:
MR = (Change in total revenue) / (change in quantity sold)
= ( ᅀ TR) / ( ᅀ Q)

or, MR = TRn – TRn-1

and, ∑MR = TR

Marginal revenue is the change in total revenue on


account of the sale of one more (or one less) unit of
output.
Average revenue

Average revenue refers to revenue per unit of output sold.


AR = TR / Q

Average revenue is the per unit revenue received from the


sale of a commodity. It is the same as price of the
commodity.

AR = TR/Q = (P*Q) / Q = P
What happens if AR is constant?
AR is constant (means price is constant), then MR is also
constant. Constant MR implies constant addition to TR when
an additional unit of output is sold. This implies that TR will
increase at a constant rate.

Output Q AR = P (Rs) TR = AR * Q MR = TRn –


(units) TRn-1
1 10 10 10 – 0 = 10

2 10 20 20 – 10 = 10

3 10 30 30 – 20 = 10
TR
REVENUE (Rs)

AR = MR

OUTPUT (units)

REVENUE (Rs)

OUTPUT (Units)
What happens if AR is not constant?
Q AR = P TR = AR * Q MR = TRn – TRn-1
1 10 10 10
2 9.5 19 9
3 9 27 8

In this case, as AR is declining by Re 0.5, MR is declining by Re 1.


This proves that under monopoly and monopolistic competition MR
declines faster than AR. So AR > MR.
And TR increases at diminishing rate.
Can MR be zero or negative?
Q (units) AR = P (Rs) TR = AR * Q MR = TRn –
(Rs) TRn-1 (Rs)
1 100 100 100
2 75 150 50
3 50 150 0
4 30 120 -30

Yes, but only when price is declining as under monopoly or


monopolistic competition.
TR stops increasing when MR = 0 so that TR is maximum
when MR = 0 and starts declining when MR is negative.
AVERAGE / MARGINAL REVENUE (Rs)
TOTAL REVENUE (Rs)

MR(-ve)
OUTPUT (Units)

OUTPUT (units)
TR is max

TR

AR
Revenue curve in different markets
Broadly, markets are of three types: -

1) Perfectly competitive market

2) Monopoly market

3) Monopolistic competitive market


Perfectly competitive market
A firm is a price taker. It can sell any number of units of output
at the prevailing price. If a firm tries to sell at a price higher
than market price, it will lose all its customers. Constant price
means constant AR, hence constant MR and TR increasing at
constant rate. AR and MR curves are perfectly elastic under
perfect competition. AR = MR
REVENUE (Rs)

OUTPUT (Units)
Monopoly market
The AR and MR curves under monopoly slope downwards from
left to right. It means that if a monopolist desires to sell more,
he has to reduce price of the product. A monopolist by
definition is a price maker. Being a single seller of the product
in the market, he can fix whatever price he wishes to. But, he
can sell more only if he lowers the price of the product. Thus,
there is negative relationship between price of the product and
demand for the product in a monopoly market. Accordingly AR
curve slopes downwards means there is inverse relationship
between AR (price) and output.
Revenue curve under monopoly

Q AR = P TR = AR * Q MR = TRn – TRn-1
1 10 10 10
2 9 18 8
3 8 24 6
REVENUE (Rs)

AR

MR
OUTPUT (Units)
Monopolistic competitive market
Revenue curves under monopolistic competition are similar
to monopoly. The difference is that under monopolistic
competition AR and MR are more elastic. It means that in
response to a change in price, the change in demand will be
relatively more as compared to monopoly market. It is
because monopolistic competitive market goods have close
substitutes. On the other hand monopoly market goods do
not have close substitutes.
Revenue curve under monopolistic competitive market

REVENUE (Rs)

AR
MR

OUTPUT (Units)
Comparative look
REVENUE (Rs)

Perfect competition

Monopolistic competition

Monopoly

OUTPUT (Units)
THANK YOU