CONCEPT OF REVENUE

Revenue of a firm is whatever it earns from the sale of its products, in the form
of sale or money receipts.

Total revenue: it’s the money receipts of a firm earned from the sale of total
output.
Marginal revenue: is the change in the total revenue on account of sale of an
additional unit of output. It can be positive, 0, or negative.
Since MR is additional revenue, sum total of MR corresponding to each unit of
output is TR.
Average revenue: is revenue received from sale of per unit output. It is same as
price of output.
If, AR is constant, MR=AR. Constant MR means constant addition to TR,
which means TR will increase at a constant rate.
AR curve is also same as, demand curve or price line, as demand curve shows
relation between price and output.

Relationship between AR and MR:

1. When AR is constant, AR=MR
2. When AR declines, MR declines
3. MR declines faster than AR, so AR > MR.

When MR is declining, we are adding less and less to each TR, so, TR is
increasing at a decreasing rate.

Relationship between TR and MR:

1. MR is additional revenue to TR for each additional unit of output
2. When MR is constant, TR increases at a constant rate
3. MR is declining, TR increases at declining rate
4. MR = 0, TR is at maximum. It stops increasing at this point
5. MR is negative, TR starts to decline.
AR is always non-negative. When AR touches x-axis, i.e. it becomes 0, TR also
becomes 0 / touches x-axis.

Firm’s demand curve: is a curve showing the relationship between the price of
the products produced and their quantity demanded. Since firm’s AR = P, and
the AR curve also shows the same thing, we can say that the firm’s demand
curve = firm’s AR curve = firm’s price line.
Perfect competition or perfectly competitive market – is a market, where all
firms sell identical products at same/prevailing price. The firms cannot affect
the market price of a product, but the price can change due to change in market
conditions. So, in this case a firm cannot increase its price as it will lose all its
customers, as they have other firms from where they can buy the same product
at the prevailing price; and it cannot afford to decrease the price.
Thus firm’s AR curve is perfectly elastic under perfect competition.

Slope of TR from origin to any point on the curve gives AR.