Revenue and Revenue Curves:

Revenue is the earning of the firm by selling it’s products. The earning of the firm can be explained by
dividing into 3 types such as total revenue(TR), average revenue(AR), and marginal revenue(MR).

Concept of TR, AR and MR :

Total Revenue(TR):

Total revenue is understood as the total amount of money earned by the firm by selling its product. TR
can be found by multiplying total quantity sold and price per unit of commodity. Symbolically, TR = P x
Q where, P= per unit price

Q= quantity of commodity sold

Average Revenue(AR):

Average revenue is the revenue per unit of a commodity. In other words AR can be found by dividing
total revenue by the quantity of commodity sold. Symbolically,

AR = TR/Q where, Q = quantity of commodity sold

If the different unit of the commodity are sold at the same price in the market then the average revenue
and price are equal. In general different units of a commodity are sold at same price. Hence average
revenue and price are equal. In economics AR is synonymous with price.

Revenue of a firm is the expenditure of a consumer. So the AR curve of the firm is the market demand
curve of a consumer for a particular commodity. For example, demand curve shows the different
quantity of a commodity are demanded at various price level of prices or a consumer is ready to pay the
price for different quantity of a commodity. Hence consumers demand curve is the firms average
revenue curve, because the price paid by a consumer is the revenue from the point of view of the firm.

Marginal Revenue:

Marginal revenue is the net revenue earned by selling one additional unit of the product. Algebrically, it
is the addition to the total revenue earned by selling ‘n’ units of products instead of selling ‘n-1’ units.
Hence,

MR = TRn-TRn-1

where, TRn =total revenue earned by selling ‘n’ units of products

TRn-1 = total revenue earned by selling ‘n-1’ units of products

MR can be explained clearly with the help of numerical example, let by selling 5 units of product a firm
earns Rs 100 and 6 units of products earns Rs 115. Here MR =115-100 = 15. MR can be explained as the
change in total revenue due to sale of one extra unit (one unit change in quantity sold). Mathematically,

MR = TR/Q

where, TR = change in total revenue

 Q = one unit change in quantity

Revenue curve under perfect competition:

Under perfect competition, price is determined by the industry as a whole. This is so because an
individual firm or a consumer under perfect competition by its own action cannot influence the price. In
other words, under perfect competition price is determined by demand and supply of commodity. Once
the price is determined, firm can sell any amount of commodity at ruling market price. Hence under
perfect competition, different units of goods can be sold at same price. So the average revenue of a firm
under perfect competition is horizontal straight line parallel to X-axis. In short, under perfect competition
average revenue, marginal revenue and price of a commodity all are equal. This is so because additional
unit of commodity are sold at same price as before. This can be explained with the help of following
table:

Quantity sold (Q) AR/Price =P TR = P x Q MR

1 10 10 10
2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10

It is seen in the table that per unit price of a commodity remains constant at Rs 10 even if the more units
are sold. Total revenue increases at constant rate like 10 to 20, 20 to 30,…..and so on.

If the different units of commodity are sold at constant price then the marginal revenue remains same
because the addition made to the total revenue by selling one additional unit of commodity is Rs10 .
Hence under perfect competition TR increases at constant rate and AR and MR are equal even if more
units are sold. This can be explained with the help of following figure:

In the figure above, revenue has been measured along vertical axis and quantity of commodity sold
along horizontal axis. TR is the total revenue curve. TR begins from origin indicates TR is zero when
quantity sold is zero. The positive slope of TR shows TR increases when quantity sold increases. TR is a
straight line represents the rate of increase in total revenue is constant. This is so because under perfect
competition, the price remains same whatever the quantity of commodity is sold. AR is the average
revenue curve and it is parallel to horizontal axis represents that price remains same even if the quantity
sold increases. Hence MR curve coinciding with AR indicates MR also remains constant under perfect
competition.

Revenue curve under imperfect competition:

Under imperfect competition, it is assumed that to salel more quantity of the commodity, the firm has to
reduce the price. According to the law of demand, more quantity will be demanded at lower price, so to
sale more the firm must reduce the price under monopoly. Due to this fact under imperfect competition,
average revenue goes on declining . Therefore, MR also goes on declining because MR is the addition to
the total revenue when one more unit of commodity is sold. Under imperfect competition MR decreases
more rapidly than AR. In short TR increases at decreasing rate, reaches to maximum and starts to
decline. This can be explained with the help of following table:

Quantity sold (Q) AR/Price =P TR = P x Q MR

1 6 06 06
2 5 10 04
3 4 12 02
4 3 12 00
5 2 10 -2
6 1 06 -4

In the table above first column shows the quantity of commodity sold, second column shows the average
revenue or price and 3rd and 4th column shows the total and marginal revenue respectively. MR has been
derived from the total revenue column of the table. It is seen in the table that when more units are sold,
the price has been reduced. Due to this AR and MR both declines. MR declines more rapidly than AR. MR
is zero when T R is maximum and MR becomes negative when TR decreases. This can be explained with
the help of following diagram:

In the figure above, revenue has been measured along vertical axis and quantity of commodity sold
along horizontal axis. TR, AR and MR represents the total revenue, average revenue and marginal
revenue curves respectively. TR begins from origin indicates TR is zero when quantity sold is nil. TR curve
slopes upward initially or increases at decreasing rate in the beginning reaches to maximum at M and
starts to decline. It is seen in the figure that AR curve slopes downward indicates that to sale more the
price must be reduced under imperfect competition. MR curve also has negative slope or MR curve
slopes downwards represents under monopoly TR increases at decreasing rate. MR lies below the AR
indicates MR falls more rapidly than AR. It is seen in the figure that when TR is maximum, MR is zero.
Until MR is positive, TR increases, when MR is zero TR is maximum and when MR becomes negative, TR
declines. AR and MR starts from same point indicates that when 1 st unit of commodity has been sold, AR
and MR is same. MR passes through the midpoints of perpendiculars drawn from the points of AR to the
vertical axis. Hence in the above diagram, AB is equal to BC.