LECTURE 15

REVENUE FUNCTION
What is Revenue?

Revenue is the income to the producer/seller. Example: Joe is running a factory that
produces 1000 ice creams daily. By selling these ice creams, he gets Rs. 2000. This
amount of Rs.2000 is called revenue.

Concepts of Revenue:

1. Total Revenue (TR)

2. Average Revenue (AR)
3. Marginal Revenue (MR)
❑ Total Revenue: It is the total revenue a firm gets by selling a given quantity of a product.
If 100 ice creams are sold at the rate of Rs 50 per ice cream, total revenue will
be 100* Rs 50= Rs 5000

Quantity sold * Price= Total Revenue

(quantity sold is equal to what is being demanded in the economy)

❑ Marginal Revenue: It is the change in total revenue due to change in quantity of a

commodity

∆𝐓𝐑
𝐌𝐑 =
∆𝐐

❑ Average Revenue: It is the revenue per unit of output sold. It is also known as Price

𝐓𝐑 𝑷∗𝑸
A𝐑 = = = P
𝐐 𝐐
 Practical Example: If AR (or price) is constant
Output Price Total Revenue Marginal
Q P=AR TR= AR*Q Revenue
∆𝐓𝐑
𝐌𝐑 =
∆𝐐
1 10 10 -
2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10

If AR is constant

MR=AR

AR curve is also called the demand curve

Calculus: Slope of AR & MR
∆𝐓𝐑
Marginal Revenue =
Average Revenue= Price ∆𝐐

𝑎 𝑄 𝑎𝑄 𝑄2
Demand function: 𝑄 = 𝑎 − 𝑏𝑃 TR= P*Q =( − )* Q = -
𝑎−𝑄 𝑎 𝑄 𝑏 𝑏 𝑏 𝑏
𝑃= = − MR=
𝑑𝑇𝑅 𝑎
= −
2𝑄
𝑏 𝑏 𝑏
𝑑𝑄 𝑏 𝑏
𝟏
Therefore, Slope of AR curve is - 𝟐
𝒃 Therefore, Slope of MR curve is -
𝒃

Slope of MR curve is twice the Slope of AR curve. MR curve is more

steeper. Both slopes are negative i.e. downward sloping

Steeper the slope, it is more close to the vertical axis and less flatter
Practical Example: If AR (or price) is NOT constant
Output Price Total Marginal
Q P=AR Revenue Revenue
TR= AR*Q ∆𝐓𝐑
𝐌𝐑 =
∆𝐐
1 10 10 -
2 9.5 19 9
3 9 27 8
4 8.5 34 7

If AR is not constant
AR FALLS
MR ALSO FALLS
Can MR be Zero or Negative?
TR is maximum when
MR=0

Output Price Total Revenue Marginal Revenue

Q P=AR TR= AR*Q ∆𝐓𝐑
𝐌𝐑 =
∆𝐐
1 100 100 -
2 80 160 60
4 40 160 0
5 30 150 -10
 AR, MR and Elasticity of Demand UPPERSEGME
NT

𝐿𝑂𝑊𝐸𝑅 𝑆𝐸𝐺𝑀𝐸𝑁𝑇 𝑂𝐹 𝐴𝑅 𝐶𝑈𝑅𝑉𝐸 LOWER

𝐸𝑑 = SEGMENT
𝑈𝑃𝑃𝐸𝑅 𝑆𝐸𝐺𝑀𝐸𝑁𝑇 𝑂𝐹 𝐴𝑅 𝐶𝑈𝑅𝑉𝐸

𝐴𝑅
𝐸𝑑 =
𝐴𝑅−𝑀𝑅

If MR>0 𝐸𝑑 >1
C

If MR<0 𝐸𝑑 <1