Revenue Concept : Economics class 11

What is Revenue ?

Revenue means the amount of income received from the sale of its product in a given period by the firm.

A company’s revenue is what it earns from selling commodities, and services to consumers, which are its normal business pursuits. It is also called turnover or sale. Royalty, fees or interest may also be a source of revenue.

By setting a cost price less than or equivalent to the market cost price, an enterprise believes it can sell as many quantities of its product as it needs. The rationale for lowering the cost price of a product is lost in such a scenario. As a result, the enterprise should set a cost price that matches the market price of the commodity to the greatest extent possible.

Revenue and Profit are different concept:

Revenue is the total amount of income generated by the sale of goods or services related to the company’s primary operations.

Revenue also known as sales, does not deduct any costs or expenses associated with operating the business.

Profit is the amount of income that remains after accounting for all expenses, debts, additional income streams and operating costs.

While revenue and profit both refer to money a company earns, it’s possible for a company to generate revenue but have a net loss.

Companies report both revenue and profit on its income Statement, though it is reported on different areas of report.

There are three main concept of revenue, namely

1. Total Revenue

2. Average Revenue

3. Marginal Revenue

1. Total Revenue (TR):

Total revenue refers to the total amount of income received by the firm from selling a given amount of its product.
Total revenue is equal to the price of the commodity multiplied by the total number of units sold at that price.

Thus, TR = P × Q

Where, TR = Total Revenue

P = Price per unit

Q = Quantity of output sold over some time period.

TR depends on both – the price of the good being sold and the number of item sold at that price.
The more the item sold at a given price, the higher is the total revenue.
Total revenue can be obtained from marginal revenue by adding the marginal revenue of all the units i.e.,

TR = Σ MR

2. Average Revenue (AR) :

Average revenue is the amount of revenue earned per unit of the product sold.
It is per unit revenue from the sale of one unit of a commodity.
Average Revenue is obtained by dividing total revenue (TR) by the number of units of the product sold.

AR = TR / Q = (P× Q) / Q

AR = P

If all the units of a commodity are sold at the same price, then obviously the average revenue is the price of the commodity. Therefore, AR is same as the price of the commodity.

Question : Which concept of Revenue is called ‘Price’ ?

Answer: The concept of average revenue is referred to as ‘price’.

Average revenue is defined as the revenue earned per unit of output sold.

Since AR is obtained by dividing Total Revenue by Quantity of output sold i.e.,

AR = TR / Q

Where TR = total revenue

Q = quantity of output sold

since TR = P × Q

Where P = price

Q = quantity of output sold

Therefore, AR = (P×Q) / Q

AR = P

If all the units of a commodity are sold at the same price, then obviously average revenue is the price of the commodity.

3. Marginal Revenue:

Marginal Revenue is defined as the addition to total revenue which results from the sale of one additional unit of the product.
It is the change in total revenue due to the sale of one additional unit of output.

MR = TRn – TR (n-1)

TRn = total revenue earned from the sale of n unit of output

TR(n-1) = total revenue earned from the sale of (n-1) unit of output

Therefore, MR = (∆TR) / ∆Q

Where ∆TR /Q = slope of TR curve.

Thus, we can find out MR at various level of output by measuring the slope of the total revenue curve at the corresponding points.

Behaviour of Revenue under different Market Structure:

The concept of revenue can be discussed under two situation:

1. When price remains constant (under perfect competition)

2. When Price falls with rise in output (under imperfect competition)

Concept of Revenue Under Perfect Competition:

A firm under perfect competition is not required to reduce the price while selling more units of output. Here the price remain constant.

Relationship between AR and MR:

Under perfect competition, the price remains constant.
Since Average Revenue is same as price, then, AR is also constant at all level of output.

Hence, AR curve is a horizontal straight line (i.e. parallel to x – axis )

Relation between AR and MR

SN	P	Q	TR=P*Q	AR=TR/Q	MR=TRn-TR(n-1)
1.	15	1	15	15	15
2.	15	2	30	15	15
3.	15	3	45	15	15

Since the firm can sell more quantity of output at the same price, the revenue from every additional unit (MR) is equal to AR, (which is always equal to price) and it will be constant.
As a result, both AR and MR curve coincide in a horizontal straight line parallel to the x – axis.
When a firm is able to sell more output at the same price then AR = MR at all levels of output.

Relationship between TR and MR ( when price remain constant):

Since under perfect competition, Price remain constant, MR remain constant, MR – curve is a straight line parallel to x – axis.
Since MR is constant, TR also increases at a constant rate.
TR is directly proportional to the output, it shows positive sloping straight line curve with constant slope.

TR and MR when Price is constant

TR curve starts from origin, because at zero level of output TR is zero.

Concept of Revenue Under Imperfect Competition:

A firm under imperfect competition (monopoly, monopolistic competition) is required to reduce the price to sell more units of output.
Under such situation TR, MR and AR behave differently from their behaviour under perfect competition.

1. Behaviour of TR :

Behaviour of TR under imperfect competition

SN	P=AR	Output	TR=P*Q	MR=TRn-TR(n-1)
1.	20	1	20	20
2.	18	2	36	16
3.	16	3	48	12
4.	14	4	56	8
5.	12	5	60	4
6.	10	6	60	0
7.	8	7	56	-4

TR increases with diminishing rate initially with the increase in output.
TR – curve is initially positively sloped rising from zero to its maximum level at point M then falls.
The increase in TR in diminishing rate is because a producer, under imperfect competition is required to reduce the price to sell more units of output. Thus, TR increases with diminishing rate.

2. Behaviour of Average Revenue:

Behaviour of AR under imperfect competition

Average Revenue (AR) – curve is negatively sloped curve with a constant rate of change. This indicating that average revenue falls continuously as output increases.
The negative sloping of AR curve is because under imperfect competition, the firm is required to reduce the price to sell more units of output.
AR remains positive throughout, it never becomes zero or negative because the AR = Price, and price never become zero or negative.

3. Behaviour of Marginal Revenue:

Like AR curve, MR curve also has a negative slope throughout because of imperfect competition.
MR becomes zero and thereafter it is negative.
MR – curve is below AR curve, indicating r is less than AR (MR <AR) because when AR declines MR must also decline at a faster rate then AR.

Relationship between TR and MR:

Relation between Total Revenue and Marginal Revenue

Relation between TR and MR under imperfect competition

1. When TR increases with diminishing rate, MR is decreasing but remains positive.

2. When TR is maximum and constant for a while, then MR is zero.

3. When TR falls as quantity increases (TR is downward sloped) , MR is negative.

Relationship between AR and MR:

1. AR curve and MR curve both slopes downward and MR curve lies below AR curve at all level of output.

2. This means MR is always less than AR or Price. Because when price is reduced under imperfect competition, it is not only for additional unit but for all the units sold.

3. Negatively sloping AR curve is a straight line, and MR – curve is also straight line but the slope of MR curve is twice the slope of AR curve. Because the rate of fall in MR is twice the rate of fall in AR.

Significance of Revenue Curves

1. Determination of Equilibrium:

It is important to know how much a producer should produce so as to maximise his profit. Under all market structure, equilibrium is established when there is an equality between marginal revenue and marginal cost (MR = MC).

Thus, the equality of marginal revenue with marginal cost would determine the equilibrium level of output.

2. Estimation of Profits and Losses:

A producer aims at maximising his profits. But sometimes he may incur losses as well. In such a situation, he aims at minimising the losses. The total amount of profit or losses earned by a producer can be estimated from the difference between the total revenue and total cost. The amount of profit or losses earned per unit of output can be determined by taking the difference between average revenue and average cost.

Revenue Concept : Economics class 11 – 12

1 thought on “Revenue Concept : Economics class 11 – 12”

Leave a Comment Cancel Reply