Ch 07: Revenue

The amount of money that a producer receives in exchange for the sale proceeds is known as
revenue.

For example, if a firm gets Rs 20,000 from the sale of 100 chairs, then the amount of Rs 20,000
is known as revenue.

‘Revenue refers to the amount received by a firm from the sale of given quantity of a
commodity in the market.’

Profits of the firms are included in Revenue. So, Profit will be Revenue – Cost.

Concept of Revenue

The concept of revenue consists of Total Revenue, Average Revenue and Marginal Revenue.

1. Total Revenue
It is the amount a firm receives by selling a given quantity of output. TR is total money
income of a producer corresponding to a given level of output. It is estimated by the
product of quantity sold and its price.
TR = P * Q
Here, P denotes the Price of the good and Q denotes the Quantity of goods.
Qty Sold Price TR (P*Q)
1 10 10
2 9 18
3 8 24
4 7 28

2. Average Revenue
It is the per unit revenue received from the sale of commodity. It is obtained by dividing
total revenue by the number of units sold.
𝑇𝑅
AR =
𝑄
AR is same as Price
AR is equal to per unit sale receipts and price is always per unit. Sellers receives revenue
according to price, Price and AR are one and the same thing.
TR = Price * Quantity
𝑇𝑅
AR =
𝑄
 Putting the value of TR,
𝑃𝑟𝑖𝑐𝑒∗𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
AR = So, AR = Price.
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Qty. Sold TR AR = TR/Q and Price

1 10 10
2 18 9
3 24 8
4 28 7

3. Marginal Revenue
Marginal Revenue is the addition to the total revenue from the sale of an additional unit
of a commodity. MR can also be defined as change in TR (∆TR) divided by change in
quantity sold (∆Q).
When units change in consecutive order
MRn = TRn – TRn-1
When units don’t change in consecutive order
∆𝑇𝑅
MR =
∆Q

Qty Sold Price TR (P*Q) MR

1 10 10 10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
8 5 40 3.3

∆𝑇𝑅 40−30 10
MR at 8th unit is i.e. = = 3.3
∆Q 8−5 3

Relation between Revenue concepts

The relationship between different revenue concepts can be discussed under two situations:

1) When Prices are Constant

When the firm sells the product at the same price. This happens in perfect competition.
In this the firms accepts the same price as determined by the industry. It means, any
quantity of a commodity can be sold at that particular price.
2) When Price Falls with rise in output
 This happens under imperfect competition. In this situation, firms follow its own pricing
policy. However, it can increase sales only by reducing the price.

When Prices are Constant

Relationship between AR and MR

Since price remains the same, a firm sells more quantity of output at the same price, it means
revenue from additional unit (MR) is equal to AR.

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

1. In perfect competition, any amount of the commodity

can be sold at the same price therefore, TR increases at the
same rate implying AR = MR.
2. AR and MR curves coincide in horizontal straight line
parallel to X-axis.
3. The demand curve or AR curve is perfectly elastic.

Relationship between TR and MR

When price remains constant, firms can sell any quantity of output at the same price fixed by
the industry, as a result MR curve is a horizontal straight line parallel to X-axis.

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
 1. Since price of the commodity remains same, MR is
constant, therefore TR increases at the same rate.
2. TR curve is positively sloped straight line.

Relationship between TR and Price Line

When Price remains constant at all the levels of output, than Price = AR = MR. therefore, price
line is the same as MR curve. Also, TR = ∑ MR so, area under MR curve or price line will be
equal to TR. TR = OP * OQ
When Price fall with rise in Output

Relationship between AR and MR

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 will be less than AR. As a result
both AR and MR curve slopes downwards from left to right.

Qty Price / AR TR MR Ratio

1 10 10 10 --
2 9 18 8 1:2
3 8 24 6 1:2
4 7 28 4 1:2
5 6 30 2 1:2
6 5 30 0 1:2
7 4 28 -2 1:2
8 3 24 -4 1:2

Both MR and AR fall with increase in output. However, fall in

MR is double than that of AR, i.e. MR falls at a rate which s
twice the rate of fall in AR. As a result, MR curve is steeper
than the AR curve.

Relationship between TR and MR

When more of output can be sold only by lowering the price, then revenue from every
additional unit 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.
Qty Price / AR TR MR
1 10 10 10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 -2
8 3 24 -4

1. As long as MR is positive, TR increases (or when

TR rises, MR is positive).
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).
4. MR can be zero when TR remains same with
change in output.
5. MR can be negative with TR falls with rise in
output.