Concept
MEANING OF REVENUE
The amount of money that a producer receives in exchange for the sale
proceeds is known as revenue. For example, if a firm gets 16,000 from sale of
100 chairs, then the amount of 16,000 is known as revenue. Revenue refers
to the amount received by a firm from the sale of a given quantity of a
commodity in the market.
Revenue is a very important concept in economic analysis. It is directly
influenced by sales level, (... as sales increase, revenue also increases.
Concept
CONCEPT OF REVENUE
The concept of revenue consists of three important terms: Total Revenue,
Average Revenue and Marginal Revenue.
Total Revenue (TR)
Total Revenue refers to total receipts from the sale of a given quantity of a
commodity. It is the total income of a firm. Total revenue is obtained by
multiplying the quantity of the commodity.
Total Revenue = Quantity x Price
For example, if a firm sells 10 chairs at a price of Rs. 160 per chair, then the
total revenue will be:
10 Chairs x Rs. 160 = Rs. 1,600
Concept
Average Revenue (AR)
Average revenue refers to revenue per unit of output sold. It is obtained by
dividing the total revenue by the number of units sold.
For example, if total revenue from the sale of 10 chairs @ Rs. 160 per chair is
Rs. 1600, then:
Concept
AR and Price are the Same
We knew, AR is equal to per unit sale receipts and price is always per unit.
Since sellers receive revenue according to price, price and AR are one and
the same thing. This can be explained as under:
TR = Quantity x Price
Putting the value of TR from equation (1) in equation (2), we get
AR = Price
Concept
AR Curve and Demand Curve are the Same
A buyer's demand curve graphically represents the quantities demanded by a
buyer at various prices. In other words, it shows the various levels of average
revenue at which different quantities of the good are sold by the seller.
Therefore, in economics, it is customary to refer AR curve as the Demand
Curve of a firm.
Concept
Marginal Revenue (MR)
Marginal revenue is the additional revenue generated from the sale of an
additional unit of output. It is the change in TR from sale of one more unit of a
commodity.
MBn =THn TR
Where:
MRn = Marginal revenue of nth unit;
TRn = Total revenue from n units;
TRn-1 = Total revenue from (n-1) units;
N = number of units sold
For example, if the total revenue realised from sale of 10 chairs is Rs. 1,600
and that 11 chairs is Rs. 1,760, then MR of the 11 th chair will be:
MB11 = TR11 - TR10
MR11 = Rs. 1,780 – Rs. 1,600 = Rs. 180
Concept
One More way to Calculate MR
We know, MR is the change in TR when one more unit is sold. However, when
change in units sold is more than one, then MR can also be calculated as:
Let us understand this with the help of an example: If the total revenue
realized from sale of 10 chairs is Rs. 1,600 and that from sale of 14 chairs is
Rs. 2,200, then the marginal revenue will be:
Concept
TR is summation of MR
Total Revenue can also be calculated as the sum of marginal revenues of all
the units sold.
It means, TRn = MR1 + MR2 + MR3 + ………………. MRn
Or,
The concepts of TR, AR and MR can be better explained through Table 7.1
Table 7.1: TR, and MR
Relationship Between Revenue Concepts
The relationship between different revenue concepts can be discussed under
two situations:
1. When Price remains Constant (It happens under Perfect competition). In this
situation, firm has to accept the same price as determined by the industry.
It means, any quantity of a commodity can be sold at that particular price.
2. When Price Falls with rise in output (It happens under Imperfect
Competition). In this situation, firm follows its own pricing policy. However, it
can increase sales only by reducing the price.
Detailed discussion on Perfect and Imperfect Competition is given in Chapter
10.
Let us now discuss the relationship between different revenue concepts,
when:
1. When Price remains constant;
2. When Price Falls with rise in output.
Concept
Relationship between AR and MR (When Price remains Constant)
When price remains same at all output levels (like in case of perfect
competition), no firm is in a position to influence the market price of the
product. A firm can sell more quantity of output at the same price (see Table
7.2). It means, the revenue from every additional unit (MR) is equal to AR As
a result, both AR and MR curves coincide in a horizontal straight line parallel
to the X-axis as shown in Fig 7.1.
Table 7.2: AR and MR (When Price remains Constant)
As seen in the given schedule and diagram, price (AR) remains same at all
level of output and is equal to MR. As a result, demand curve (or AR curve) is
perfectly elastic.
Always remember that when a firm is able to sell more output at the same
price, then AR MR at all levels of output.
Concept
Relationship between TR and MR (When Price remains Constant)
When price remains constant, firms can sell any quantity of output at the
price fixed by the market. As a result, MR curve (and AR curve) is a horizontal
straight line parallel to the X-axis. Since MR remains constant, TR also
increases at a constant rate (see Table 7.3). Due to this reason, the TR curve
is a positively sloped straight line (see Fig.7.2) As TR is zero at zero level of
output, the TR curve starts from the origin.
Table 7.3: TR and MR
(When Price remains Constant)
Concept
Relationship between TR and Price line
When price remains constant at all the levels of output, then Price = AR =
MR. Therefore, price line is the same as MR curve. Also, TR = . So, the area
under MR curve or price line will be equal to TR. In Fig. 7.3, TR at MR level of
output = OP x OQ = Area under price line.
Concept
Relationship between AR and MR (When Price Falls with rise in
output)
When firms can increase their volume of sales only by decreasing the price,
then AR falls with increase in sale. It means, revenue from every additional
unit (i.e. MR) will be less than AR. As a result, both AR and MR curves slope
downwards from left to right. This relationship can be better understood
through Table 7.4 and Fig. 7.4:
In Table 7.4, both MR and AR fall with increase in output. However, fall in MR
is double than that in AR, i.e., MR falls at a rate which is twice the rate of fall
in AR. As a result, MR curve is steeper than the AR curve because MR is
limited to one unit, whereas, AR is derived by all the units. It leads to
comparatively lesser fall in AR than fall in MR.
It must be noted that MR can fall to zero and can even become negative
However, AR can be neither zero nor negative as TR it is always positive
Concept
General Relationship Between AR and MR
The relationship between AR and MR depends on whether the price remains
same or falls with rise in output. However, if nothing is mentioned about the
nature of price with rise in output, then the following general relation exists
between AR and MR:
1. AR increases as long as MR is higher than AR (or when MR > AR, AR
increases).
2. AR is maximum and constant when MR is equal to AR (or when MR = AR, AR
is maximum).
3. AR falls when MR is less than AR (or when MR < AR>
It must be noted that specific relationship between AR and MR depends upon
the relation of price with output, Le, whether price remains same or varies
inversely with output.
Concept
AR and MR Curves under Monopoly and Monopolistic Competition
Both, Monopoly and Monopolistic Competition fall under the category of
Imperfect Competition. Therefore, AR and MR curves slope downwards as
more units can be sold only by reducing the price. However, there is one
major difference between AR and MR curves of monopoly and monopolistic
competition.
Under monopolistic competition, the AR and MR curves are more elastic as
compared to those of Monopoly. It happens because of the presence of close
substitutes under monopolistic competition and absence of close substitutes
under monopoly. So, when price of a commodity is increased in both the
markets, then proportionate fail in demand under monopoly is less than
proportionate fall in demand under monopolistic competition.
As seen in the diagrams, AR and MR curves under monopolistic competition
(Fig. 7.7) are more elastic as compared to the AR and MR curves under
monopoly (Fig. 7.5). This concept is discussed in detail in Chapter 10.
Concept
Relationship between TR and MR (When Price Falls with rise in
output)
When more of output can be sold only by lowering the price, then revenue
from every additional unit (i.e. MR) will fall MR is the addition to TR when one
more unit of output is sold. So, TR will increase when MR is positive, TR will
fall when MR is negative and TR will be maximum when MR is zero. This
relationship can be better understood with the help of Table 75 and Fig. 7.8:
Table 7.5: TR and MR (When Price Falls with rise in output)
In Fig. 7.8, the TR curve rises as long as MR is positive. It reaches its highest
point (point A) when MR is zero (point B) and it starts declining when MR
becomes negative.
The relationship can be summed up as under:
1. As long as MR is positive, TR increases (or when TR rises, MR is positive).
2. When MR is zero, TR is at its maximum point (or when TR is maximum, MR
is zero).
3. When MR becomes negative, TR starts falling (or when TR falls, MR is
negative).
Concept
Some Important Observations
1. Zero and Negative MR: MR can be zero and even negative when price falls
with rise in output.
MR can be zero when TR remains same with rise in output.
MR can be negative when TR falls with rise in output.
However, MR cannot be zero or negative when price remains constant at all
levels of output
2. can be calculated by adding up revenue
realised from sale of every additional unit, i.e., TR = MR 1+ MR₂ +…. +
MRn = But. TC is the sum total of TFC and TVC. Since MC is not
affected by TFC, TC cannot be calculated as the summation of MC.
Solved Practicals
Example 2. Calculate TR and AR from the following data:
Example 15. Calculate TR, ART and MR from the following data:
Note: MR has been calculated in the revere order, i.e., from bottom to top.
MR is calculated after dividing change in TR by 10 units as units sold are
given at the gap of 10 units.
Example 17. Suppose, a book seller can sell 10 books at the price of ₹200
per book. His marginal revenue (MR) from the 11 th book is ₹255. At what price
did he sell the 11th book?
Solution:
TR of 10 books = 200 × 10 = ₹2,000 and MR of 11 th book = ₹255
TR of 11 books = ₹2,000 + ₹255 = ₹2,255
Prince (AR) of 11th book = TR of 11 books 11 = 2,255 11 = ₹205
Ans. Price of 11th book = ₹205
Example 18. When output increases from 50 units to 70 units, TR increases
from ₹4,000 to ₹5,000. Calculate MR.
Solution:
Ans. MR = ₹50
Comprehensive Study Guide: Economic
Revenue Concepts
Part 1: Core Concepts and Glossary
This section defines the fundamental revenue concepts. Revenue is the amount of money a
producer or firm receives from the sale of its products or services in the market. It is also
referred to as turnover or sales and is directly influenced by the sales level. The concept of
revenue is composed of three key terms: Total Revenue (TR), Average Revenue (AR), and
Marginal Revenue (MR).
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Revenue
Definition: The amount of money that a producer receives in exchange for the sale of
a given quantity of a commodity. It is the firm's earnings from its normal business
pursuits, which can include the sale of commodities and services, as well as royalties,
fees, or interest.
Example: If a firm receives ₹16,000 from the sale of 100 chairs, its revenue is
₹16,000.
Total Revenue (TR)
Definition: The total receipts or total amount of money a firm receives from selling a
given quantity of its product. It represents the total income of the firm.
Formula: TR = Price × Quantity (or TR = p × q)
Example: If a firm sells 10 chairs at a price of ₹160 per chair, the total revenue is 10
× ₹160 = ₹1,600.
Alternative Calculation: Total Revenue can also be calculated as the sum of all
marginal revenues from the units sold. The formula is TR = ΣMR.
Average Revenue (AR)
Definition: The revenue earned per unit of output sold. It is calculated by dividing the
total revenue by the number of units sold.
Formula: AR = Total Revenue / Quantity (or AR = TR / q)
Key Insight: Average Revenue is always equal to the price of the product (AR =
Price). This is because AR = (Price × Quantity) / Quantity, which simplifies
to AR = Price.
Example: If the total revenue from selling 10 chairs is ₹1,600, the average revenue is
₹1,600 / 10 = ₹160, which is the price per chair.
AR Curve and Demand Curve: A buyer's demand curve shows the quantities
demanded at various prices. Since AR represents the price at which different
quantities are sold, the AR curve is the same as the firm's demand curve.
Marginal Revenue (MR)
Definition: The additional revenue generated from the sale of one more (an
additional) unit of output. It is the change in Total Revenue when one more unit of a
commodity is sold.
Formula (for one additional unit): MRn = TRn - TRn-1
o Where MRn is the marginal revenue of the nth unit, TRn is the total revenue
from n units, and TRn-1 is the total revenue from (n-1) units.
Formula (for a change of more than one unit): MR = Change in Total
Revenue / Change in Quantity (or MR = ΔTR / ΔQ)
Example 1: If TR from 10 chairs is ₹1,600 and TR from 11 chairs is ₹1,780, the MR
of the 11th chair is ₹1,780 - ₹1,600 = ₹180.
Example 2: If TR increases from ₹4,000 to ₹5,000 when output increases from 50 to
70 units, the MR is (₹5,000 - ₹4,000) / (70 - 50) = ₹1,000 / 20 = ₹50.
Significance: Understanding MR is critical for profit maximization. A firm will
continue to produce as long as Marginal Revenue (MR) is greater than or equal to
Marginal Cost (MC). The profit-maximizing output level is where MR = MC.
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Part 2: Key Relationships Between Revenue Concepts
The relationship between TR, AR, and MR depends entirely on the market structure, which
dictates whether the price changes with the level of output.
Scenario A: When Price Remains Constant (Perfect Competition)
In a perfectly competitive market, a firm is a price-taker and can sell any quantity at the
constant market price.
Relationship between AR and MR
When the price is constant, the revenue from every additional unit sold (MR) is equal
to the price. Since Average Revenue (AR) is also always equal to the price, AR =
MR.
Graphically, the AR and MR curves coincide and form a single horizontal straight line
parallel to the X-axis (quantity axis). The demand curve is perfectly elastic.
Units Sold Price / AR (Rs.) TR (Rs.) MR (Rs.)
1 5 5 5
2 5 10 5
3 5 15 5
4 5 20 5
5 5 25 5
Relationship between TR and MR
Since MR is constant and positive, TR increases at a constant rate for each additional
unit sold.
Graphically, the TR curve is a positively sloped straight line that starts from the origin
(because TR is zero at zero output).
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Scenario B: When Price Falls with Rise in Output (Imperfect Competition)
In imperfect markets (like monopoly and monopolistic competition), a firm must lower its
price to sell more units.
Relationship between AR and MR
Both AR and MR fall as output increases.
However, the MR is always less than the AR (MR < AR).
The fall in MR is twice the rate of the fall in AR. Consequently, the MR curve is
steeper than the AR curve and lies below it.
MR can become zero and even negative, but AR (Price) remains positive.
Units Sold AR (Rs.) TR (Rs.) MR (Rs.)
1 5 5 5
2 4 8 3
3 3 9 1
4 2 8 -1
5 1 5 -3
Relationship between TR and MR
This relationship is crucial for determining the optimal output level for a firm.
1. When MR is positive, TR increases.
2. When MR is zero, TR reaches its maximum point.
3. When MR becomes negative, TR starts to fall.
A profit-maximizing firm would never produce at an output level where MR is negative, as
this would mean total revenue is decreasing.
Units Sold AR (Rs.) TR (Rs.) MR (Rs.) Relationship
1 5 5 5 MR is positive, TR is increasing.
2 4 8 3 MR is positive, TR is increasing.
3 3 9 1 MR is positive, TR is increasing.
4 2.25 9 0 MR is zero, TR is at its maximum.
5 1 5 -4 MR is negative, TR is falling.
AR and MR Curves in Monopoly vs. Monopolistic Competition
Both market structures have downward-sloping AR and MR curves.
The key difference is elasticity. Under monopolistic competition, the presence of
close substitutes makes the demand (AR curve) more elastic than under monopoly,
where there are no close substitutes. This means the AR and MR curves are flatter in
monopolistic competition.
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Part 3: Self-Assessment Quiz
Test your understanding of the core concepts and relationships.
Section 1: Multiple Choice
1. What is the correct formula for Total Revenue (TR)? a) TR = Price / Quantity b) TR =
ΔTR / ΔQ c) TR = Price × Quantity d) TR = ΣAR
2. Average Revenue (AR) is always equal to: a) Marginal Revenue (MR) b) Price (P) c)
Total Revenue (TR) d) The slope of the TR curve
3. Under perfect competition, the AR curve is: a) A downward-sloping line b) A vertical
line c) A horizontal line parallel to the X-axis d) A U-shaped curve
4. When Total Revenue (TR) reaches its maximum point, Marginal Revenue (MR) is: a)
Also at its maximum b) Negative c) Positive d) Zero
5. In imperfect competition, if a firm must lower its price to sell more units, which of the
following is true? a) AR is always greater than MR b) MR is always greater than AR
c) AR and MR are always equal d) AR can be negative
Section 2: True or False
1. A firm's demand curve is the same as its Marginal Revenue curve.
o (True / False)
2. Marginal Revenue can be negative.
o (True / False)
3. When price remains constant, Total Revenue increases at a decreasing rate.
o (True / False)
4. Under monopoly, the AR curve is more elastic than under monopolistic competition.
o (True / False)
5. Total Revenue can be calculated by summing the marginal revenues of all units sold.
o (True / False)
Section 3: Calculations
1. A firm sells 10 chairs at a price of Rs. 160 per chair. When it sells 11 chairs, its TR is
Rs. 1,760. Calculate the Marginal Revenue of the 11th chair.
2. Using the data below, calculate the Total Revenue (TR) for each unit sold.
Units Sold (Q) MR (₹) TR (₹)
1 14 ?
2 10 ?
3 7 ?
4 5 ?
1. If a firm's TR increases from ₹4,000 to ₹5,000 when its output increases from 50
units to 70 units, what is its Marginal Revenue?
Section 4: Short Answer
1. Explain why the AR and MR curves are identical in a perfectly competitive market
but different in a market with imperfect competition.
2. Describe the relationship between Total Revenue (TR) and Marginal Revenue (MR)
when the price falls as output rises. Mention all three stages.
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Part 4: Answer Key
Section 1: Multiple Choice
1. c) TR = Price × Quantity
2. b) Price (P)
3. c) A horizontal line parallel to the X-axis
4. d) Zero
5. a) AR is always greater than MR
Section 2: True or False
1. False. A firm's demand curve is the same as its Average Revenue (AR) curve.
2. True. MR becomes negative when TR starts to fall.
3. False. When price remains constant, TR increases at a constant rate.
4. False. Under monopolistic competition, the AR curve is more elastic due to the
presence of close substitutes.
5. True. TR = ΣMR.
Section 3: Calculations
1. Answer: Rs. 160
o TR from 10 chairs = 10 x 160 = Rs. 1,600
o TR from 11 chairs = Rs. 1,760
o MR of 11th chair = TRn - TRn-1 = 1,760 - 1,600 = Rs. 160
2. Answer: | Units Sold (Q) | MR (₹) | TR (₹) | | :------------- | :----- | :----- | | 1 | 14 | 14 | |
2 | 10 | 24 (14+10) | | 3 | 7 | 31 (24+7) | | 4 | 5 | 36 (31+5) |
3. Answer: ₹50
o MR = ΔTR / ΔQ
o MR = (₹5,000 - ₹4,000) / (70 - 50)
o MR = ₹1,000 / 20 = ₹50
Section 4: Short Answer
1. In perfect competition, a firm is a price-taker and can sell any quantity at a constant
market price. Since Price (AR) is fixed, the additional revenue from one more unit
(MR) is also the same as the price. Thus, AR = MR. In imperfect competition, a firm
must lower its price to sell more. This lower price applies to all units, not just the
additional one, causing the additional revenue (MR) to be less than the average
revenue or price (AR).
2. The relationship has three stages:
o Stage 1: As long as MR is positive, TR increases.
o Stage 2: When MR is zero, TR is at its maximum point.
o Stage 3: When MR becomes negative, TR starts falling.