revenue concepts

8/12/2019 Revenue Concepts

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Concept of Revenue

Treat the customer as an appreciating asset

Revenue is the total amount of money that flows intothe firm.

This can be from any source, including productsales, government subsidies, venture capital and

personal funds.Total Revenue:

Total revenue for a firm is the selling price times thequantity sold.

TR = (P Q)

Where TR: Total Revenue

P: Price

Q: Quantity Sold


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The total revenue curve can be shown as follows:

If the market demand is linear, the total

revenue curve will be a curve which initially slopes

upward, reaches the maximum point and then starts

declining.

TR

Output

TR

Q1


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Average Revenue:

Average revenue tells us how much revenue

a firm receives for the particular unit sold. Average revenue is total revenue divided by

the quantity sold, which is equal to the price of

the product.i.e. AR=P

AR = TR/q

Where, AR: Average revenueTR: Total Revenue

q: quantity sold


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Marginal Revenue:

Marginal revenue is the increase in the total

revenue received by a firm from selling extraunits of its output.

More specifically, marginal revenue is the

additional revenue that a firm receives fromputting one more unit of output in the market.

The price obviously, is the average revenue

that the seller receives.The following table indicates how the TR, AR

and MR is calculated:


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No. of Units

Sold (Q)

Price of the

Product (P)

Total Revenue

(P.Q)

Average

Revenue

(TR/q)

Marginal

Revenue

1 16 16 16 -

2 15 30 15 14

3 14 42 14 12

4 13 52 13 105 12 60 12 8

6 11 66 11 6

7 10 70 10 4

8 9 72 9 2

9 8 72 8 0

10 7 70 7 -2


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Following the above table, the average revenue

and the marginal revenue curves can be derived as

followsY

X

Om

Revenue

Quantity

AR

MR


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However, in the situation of perfect com pet i tion,

where the average revenue or price is constantdue

to the market intervention, the marginal revenuewill also be constant.

If the price or average revenue remains the same,

when more and more units are sold, the marginal

revenue will be equal to average revenue.This is so because when one more unit is sold and

the price does not fall, the addition made to the total

revenue by that unit will be equal to the price at

which it is sold since no loss in revenue is incurred

on the previous units in this case.

This will be better understood by the following table


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No. of Units Sold

(Q)

Price of the

Product (P) or

Average Revenue

(AR)

Total Revenue

(P.Q)

Marginal Revenue

(MR)

1 16 16 -

2 16 32 16

3 16 48 16

4 16 64 16

5 16 80 16

6 16 96 16

7 16 112 16

8 16 128 16

9 16 144 16

10 16 160 16


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The case of perfect competition when for an

individual firm average revenue (or price) remains

constant and marginal revenue is equal to averagerevenue can be shown by the following diagram:

O

AR & MR

Quantity

AR=MRP


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From the diagram it is clear that the averagerevenue curve is a horizontal strait line.

Horizontal strait line average revenue curve

indicates that price or average revenueremains the same at OP level when quantity

sold is increased.

Marginal revenue curve coincides with theaverage revenue curve since marginal

revenue is equal to the average revenue.


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Equilibrium of a Firm: Equilibrium is a situation which is very essential to the firm.

Any effort to sell at a price higher than the equilibrium price

would be frustrated by the competitors, while no rational firmlike to sell at a price lower than what it could get.

If a firm wants to maximize his profit then first he shoulddetermine its price.

The rational behind the theory is: if the production and sale ofan additional unit of product adds more to revenues than tocosts, profit is increased and thus that unit should beproduced and sold.

If the additional unit of output involves larger costs than

revenues, it should not be produced. More specifically, the firm continues to increase output until

the marginal revenue is larger than the marginal cost.Therefore, a firm will be in equilibrium, when:

MR=MC

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