Revenue Curves

In modern economics, the equilibrium of the firm is discussed in terms of cost and revenue.
The profits of the firm are also calculated by the costs and the revenues of the firm. In the previous
chapter we have explained the cost of production and now in the present chapter we shall describe
the concept of revenue.
The term 'revenue' refers to the receipts obtained by a firm from the sale of certain quantities of a
commodity at various prices. The revenue concept relates to total revenue, average revenue and
marginal revenue.
Total revenue is the total sale proceeds of a firm by selling a commodity at a given price. If a firm
sells 2 units of commodity at Rs. 18, total revenue is 2 x 18 = Rs. 36. Thus total revenue is price
per unit multiplied by the number of units sold, i.e. R = P x Q, where R is the total revenue. P the
price and Q the quantity.
Average Revenue (AR or A) is the average receipts from the sale of certain units of the commodity.
It is found out by dividing the total revenue by the number of units sold. Mathematically.
TR
AR = TQ
Where, AR = Average Revenue, TR = Total Revenue, Q = Number of units of the commodity
sold.
Marginal Revenue (MR or M) is defined as the extra revenue secured from the sale of an additional
unit of the commodity. It is then the revenue derived from the last unit sold. To calculate MR, we
subtract total revenue of the sale of a unit or several units at same particular price from total
revenue derived from the sale of the next. Mathematically.
MRn = TRnTRn-1
Where, MRn = Marginal revenue of the n unit, TRn = Total revenue of nth units, TR n-1 = Total
revenue of nth-1 unit, nlh= Any given number of units sold.
The total revenue and the relationship between average revenue and marginal revenue under pure
competition, monopoly and other market situations is discussed below.
The total revenue, average revenue and marginal revenue can be discussed under pure competition,
monopoly or monopolistic competition or imperfect competition.
Revenue curves of a firm under perfect competition: Perfect competition is the term applied to
a situation in which the individual buyer or seller (firm) represents such a small share of the total
business transacted in the market that he exerts no perceptible influence on the price of commodity
in which he deals. Thus in perfect competition an individual firm is a price taker, because the price
is determined by the collective force of market demand and market supply which are not influenced
by the individual. When price is the same for all units of a commodity, naturally average revenue
(price) will be equal to marginal revenue (AR=MR).
Table – 14.1 : Under Perfect Competition
Q AR (=P) Rs. TR Rs. MR Rs.
1 20 20 20
2 20 40 20
3 20 60 20
4 20 80 20
5 20 100 20
6 20 120 20

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This can also be illustrated with the help of an imaginary revenue schedule as in Table 10.1. It
indicates that price of Rs. 20 is given to the individual firm which is determined by the industry.
As the firm sells more or more as the given price, its total revenue will increase but the rate of
increase in total revenue is constant because AR=MR.

Fig. 14.1 Fig. 14.2 Fig. 14.3

Thus the demand for the firm's product becomes infinitely elastic. Since demand curve is the firm's
average revenue curve, the shape of the AR curve is horizontal to the X-axis at the price OP as
shown in Fig. 14.2 and the MR curve coincides with it. This is also shown in Table where AR and
MR remain constant at Rs. 20 at every level of output. Any change in the demand and supply
conditions will change the market price of the product, and consequently the horizontal AR curve
of the firm.
Revenue curves under Monopoly or Imperfect Competition:
The average revenue curve is the downward sloping industry demand curve, and its
corresponding marginal revenue curve lies below it. The relation between the average revenue and
the marginal revenue under monopoly can be understood with the help of Table 14.2. The marginal
revenue is lower than the average revenue. Given the demand for his product, the monopolist can
increase his sales by lowering the price, marginal revenue falls but the rate of fall in marginal
revenue is greater than that in average revenue.
Table 14.2 : Revenues Under Monopoly/Imperfect Competition
Q AR (=P) Rs. TR Rs. MR Rs.
1 20 20 20
2 18 36 16
3 16 48 12
4 14 56 8
5 12 60 4
6 10 60 0
7 8 56 -4
In table 14.2 AR falls by Rs. 2 at a time, whereas MR falls by Rs. 4. This is shown in Figure 14.4
in which the MR curve is below to AR curve. Marginal revenue when two units are sold then
would be Rs. 16 (36-20); when three units are sold, Rs. 12 (48-36) and so on. Here we would note
that MR is not the same as price (or AR) because, in order to sell the third unit, it was necessary
to reduce the price of the first two units to selling price of the third, Rs. 16. In other words, two
units can be sold for Rs. 18 but in order to sell three units it is necessary to reduce the price to Rs.
16.

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 Fig. 14.4 Fig. 14.5
Thus the decrease in MR will be higher than the decrease in AR. Now, in Fig. 14.4, we draw the
average revenue (demand) and marginal revenue curves on the basis of the data provided in table
14.2, and see that MR will be less than AR (or Price) at all levels. Notice that when seven units
are sold, MR becomes negative: as price is lowered from 10 to 8, TR becomes 60 to 56.
Since marginal revenue under perfect competition remains constant and is equal to AR, total
revenue curve under perfect (Pure) competition will be a straight line from the origin as shown in
the figure 14.3.
Under monopoly, average revenue (or price) falls when additional units of the good are sold in
the market can be graphically represented in the Fig. 14.5. In this figure the slope of the TR curve
is declining.
Important Questions :-
Q. 1. Explain the nature of TR, AR and MR curves in perfect competition.
Q.2. Explain the nature of total revenue, average revenue and marginal revenue curves in
monopoly.