Economics

Theory of Production
Revenue of Firm

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 Agenda
Type of Revenue of Firm – Total, Marginal
and Average

Revenue Under Perfect Competition

Revenue Under Imperfect Competition

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 Revenue of the Firm

In the previous Chapter we discussed about cost of the firm, In this chapter we shall
study about the Revenue of the Firm
 Revenue of the Firm

Total Revenue

Marginal Revenue

Average Revenue
 Revenue of the Firm
Total Revenue

By 'total revenue' of a firm is meant the total amount of sale proceeds or the total receipts of the firm

Example: If a firm producing cloth sells one hundred meters of cloth in the market at $4 per meter, the sale
proceeds or the receipts of the firm win be $400.

This total sale proceed which a firm has received by selling 100 meters of cloth is called its total revenue.

The total revenue varies with the sales of a firm.

Total Revenue = Total Price * Quantity Sold

 Revenue of the Firm
Marginal Revenue

Marginal revenue is the addition made to the total revenue by a one unit increase in the volume of sales by
the firm in the market. It can also called as the net revenue earned by selling on additional unit of output.

Example: For example, if a firm sells 100 meters of cloth at $4 per meters, the total revenue of the firm is
$400. If it increases the volume of sale from 100 meters to 101 meters, i.e., by one meter, the total revenue of
the firm goes up to $404. The addition of $4 which has taken place in the total revenue by a one unit increase
in the rate of sales per period of time is known as marginal revenue. MR can be expressed as follows.

MR = Change in revenue by selling one additional unit / Additional Units Sold

 Revenue of the Firm
Average Revenue

Average revenue is revenue earned per unit of output. Average revenue is obtained by dividing the total revenue by the
number of units sold in the market.

Example: For example, a firm sells 200 meters of cloth for $600, then the average, revenue will be 600 / 200
= $3 only. Average revenue represents the average sale price per unit of the commodity.

AR = Total Revenue Sold / Total Output Sold

 Agenda
Type of Revenue of Firm – Total, Marginal
and Average

Revenue Under Perfect Competition

Revenue Under Imperfect Competition

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 Revenue Under Perfect Competition

What is Perfect Competition?

The number of buyers and sellers is so large that an individual buyer or an individual seller
cannot influence the market price.

The sellers sell identical and homogeneous goods

There will be one price for the identical goods in all parts of the market

If any seller wishes to sell its goods at a price lower than the market price, its goods will be sold
in no time as all the buyers have perfect knowledge of the market.

If he keeps the price higher than the market price, the goods will not be sold.

The seller in order to get the maximum profit will have to sell its total output at the prevailing
market price
Revenue Under Perfect Competition

DD is the demand curve which an individual firm has to

face. A firm whether it produces 5 units or 50 units has to
sell its product at the prevailing market price, i.e., at $5. If
at any time the aggregate demand rises, and the price
settles at PR (i.e., $8), then an individual seller can sell its
products at $8
Revenue Under Perfect Competition

Under perfect competition, the additional output is sold at

the price at which, the first unit is sold. The average
revenue curve is, therefore, always equal to marginal
revenue and so both the curves AR and MR coincide.
Revenue Under Perfect Competition

Under perfect competition, the additional output is sold at

the price at which, the first unit is sold. The average
revenue curve is, therefore, always equal to marginal
revenue and so both the curves AR and MR coincide.
 Agenda
Type of Revenue of Firm – Total, Marginal
and Average

Revenue Under Perfect Competition

Revenue Under Imperfect Competition

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Revenue Under Imperfect Competition

We will do later?
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