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CHPTER-7 REVENUE
Meaning of revenue
 Revenue refers to the amount received by a firm from the sale of a given quantity of a commodity in
the market.
 It is directly influenced by sales level, i.e., as sales increase, revenue also increases.
 For example, if a firm gets ` 16,000 from sale of 100 chairs, then the amount of ` 16,000 is known as
revenue.
CONCEPT OF 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 sold with the price of the
commodity. (P*Q)

 Total Revenue = Quantity x Price

 For example, if a firm sells 10 chairs at a price of rs160 per chair, then the total revenue will be: 10
Chairs x 160rs = rs1,600
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 @ rs160 per chair is rs1,600, then:

AR and Price are the Same

We know, 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 ... (1)

...(2)

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Putting the value of TR from equation (1) in equation (2), we get

AR = Price
AR Curve and Demand Curve are the Same
 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.
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.
 MRn = TRn-TRn-1
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 realized from sale of 10 chairs is rs1,600 and that from sale of 11
chairs is ` 1,780, then MR of the 11th chair will be:
MRn = TRn-TR10
MRn = rs1,780 - rs1,600 = rs180
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 realised from sale of 10
chairs is ` 1,600 and that from sale of 14 chairs is ` 2,200, then the marginal revenue will be:

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,
TR= ΣMR

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RELATIONSHIP BETWEEN REVENUE CONCEPTS

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 7.1).
 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)
Units sold Price / AR TR( ` ) MR( ` )
(`)
1 5 5 5
2 5 10 5
3 5 15 5
4 5 20 5
5 5 25 5
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.
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)

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Units sold Price /AR ( ` TR( ` ) MR( ` )
)
1 5 5 5
2 5 10 5
3 5 15 5
4 5 20 5
5 5 25 5

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 = ΣMR. 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.

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:

Table 7.4: AR and MR (When Price Falls with rise in output)

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Units AR( ` ) TR( ` ) MR( ` ) Ratio of Fall (AR:MR)
sold
1 5 5 5 —
2 4 8 3 1 :2
3 3 9 1 1 :2
4 2 8 -1 1 :2
5 1 5 -3 1 :2

According To 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.
 NOTE :-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.
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, AR falls)

It must be noted that specific relationship between AR and MR depends upon the relation of price with
output, i.e., whether price remains same or varies inversely with output.

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(AR and MR Curves under Monopoly and Monopolistic Competition)

a) Both, Monopoly and Monopolistic Competition fall under the category of Imperfect Competition.
b) Therefore, AR and MR curves slope downwards as more units can be sold only by reducing the price.
c) However, there is one major difference between AR and MR curves of monopoly and monopolistic competition.
d) Under monopolistic competition, the AR and MR curves are more elastic as compared to those
of Monopoly.
e) It happens because of the presence of close substitutes under monopolistic competition and
absence of close substitutes under monopoly.
f) So, when price of a commodity is increased in both the markets, then proportionate fall 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. 7.6)

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 7.5 and Fig. 7.8:
Table 7.5: TR and MR (When Price Falls with rise in output)
Unite sold AR( ` ) TR( ` ) MR( ` )
1 5 5 5
2 4 8 3
3 3 9 1
4 2.25 9 0
5 1 5 -4
 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).
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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).

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. TR = ΣMR, but TC # ΣMC:

 TR can be calculated by adding up revenue realized from sale of every additional unit, i.e., TR = MR1
+ MR2 + ... + MRn = ΣMR .
 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.

Important Formulae at a Glance

1. TR = Price (AR) x Quantity (units sold) Or TR = ΣMR
2. AR (Price) = TR ÷ Units sold (Q)
3. MRn = TRn - TRn-1
REVISION OF KEY POINTS
• Revenue refers to the amount received by a firm from the sale of a given quantity of a commodity in the market.
• Total revenue refers to total receipts from the sale of a given quantity of a commodity.
• Average revenue is defined as the revenue per unit of output sold (AR = Price).
• Marginal revenue is the additional revenue generated from the sale of an additional unit of output.
• Relationship between AR and MR (When Price remains Constant): AR = MR and both the curves coincide in
a horizontal straight line parallel to the X-axis.
• Relationship between TR and MR (When Price remains Constant): TR increases at a constant rate and the TR
curve is a 45° positively sloped straight line due to constant MR.

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• Relationship between TR and Price line: Area under the MR curve = Area under the price line =TR.
• Relationship between AR and MR (When Price Falls with rise in output): AR and MR curves slope
downwards from left to right, but MR falls at a rate which is twice the rate of fall in AR.
• Relationship between TR and MR (When Price Falls with rise in output):
(a) As long as MR is positive, TR increases;
(b) When MR is zero, TR is at its maximum point;
(c) When MR becomes negative, TR starts falling.

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