The amount of money that a producer receives in exchange for the sale of goods is known as revenue.
RevenueAnalysis Theamount of money that a producer receives in exchange for the sale of goods isknown as revenue. In short, revenue means sales revenue. It is the amountreceived by a firm from the sale of a given quantity of a commodity at theprevailing price in the market. For example, if a firm sells 10 books at theprice of Rs.100 each, the total revenue will be Rs. 1000. The threebasic revenue concepts are: Total Revenue, Average Revenue and MarginalRevenue. Totalrevenue is the amount of income received by the firm from the sale of itsproducts. It is obtained by multiplying the price of the commodity by thenumber of units sold. TR=P × Q where, TRdenotes Total Revenue, P denotesPrice and Q denotesQuantity sold. Forexample, a cell-phone company sold 100 cell-phones at the price of Rs. 500 each.1. RevenueConcepts
a. Total Revenue:
TR is Rs. 50,000. (TR= 500 × 100 = 50,000).
When price is constant, thebehaviour of TR is shown in table 4.8 and diagram 4.10, assuming P=5. When P = 5; TR = PQ
When price is declining withincrease in quantity sold. (Eg. Imperfect Competition on the goods market) the behaviour of TR is shown in table 4.9 anddiagram 4.11. TR can be obtained from Demand fuction: If Q = 11–P,
When P =1, Q = 10
TR = PQ =1 × 10 = 10
When P =3, Q = 8, TR = 24
When P =0, Q = 1, TR = 10
b. AverageRevenue
Averagerevenue is the revenue per unit of the commodity sold. It is calculated bydividing the Total Revenue(TR) by the number of units sold (Q)
AR = TR /Q; if TR =PQ, AR = PQ/Q = P
ARdenotes Average Revenue, TR denotes Total Revenue and Q denotes Quantity ofunit sold.
Forexample, if the Total Revenue from the sale of 5 units is Rs 30, the AverageRevenue is Rs.6. (AR= 30/5 =6) It is to be noted that AR is equal to Price.
AR=TR/Q =PQ/Q=P
c. Marginal Revenue
Marginalrevenue (MR) is the addition to the total revenue by the sale of an additionalunit of a commodity. MR can be found out by dividing change in total revenue bythe change in quantity sold out. MR = ∆TR / ∆Q where MR denotes MarginalRevenue, ∆TR denotes change in Total Revenue and ∆Q denotes change in totalquantity.
The othermethod of estimating MR is:
MR=TRn–TRn-1 (or) TRn+1 – TRn
where, MRdenotes Marginal Revenue, TRn denotes total revenue of nthitem, TRn-1 denotes Total Revenue of n -1th item and TRn+1denotes Total Revenue of n+1th item.
If TR =PQ MR = dTR/dQ = P, which is equal to AR.
2. Relationshipbetween AR and MR Curves
If a firmis able to sell additional units at the same price then AR and MR will beconstant and equal. If the firm is able to sell additional units only byreducing the price, then both AR and MR will fall and be different .
Constant AR and MR (at Fixed Price)
Whenprice remains constant or fixed, the MR will be also constant and will coincidewith AR. Under perfect competition as the price is uniform and fixed, AR isequal to MR and their shape will be a straight line horizontal to X axis. TheAR and MR Schedule under constant price is given in Table 4.10 and in thediagram 4.12
DecliningAR and MR (at Declining Price)
When afirm sells large quantities at lower prices both AR and MR will fall but thefall in MR will be more steeper than the fall in the AR.
It is tobe noted that MR will be lower than AR. Both AR and MR will be slopingdownwards straight from left to right. The MR curve divides the distancebetween AR Curve and Y axis into two equal parts. The decline in AR need not bea straight line or linear. If the prices are declining with the increase inquantity sold, the AR can be non-linear, taking a shape of concave or convex tothe origin.
3. Relationshipamong TR, AR and MR Curves:
When marginalrevenue is positive, total revenue rises, when MR is zero the total revenuebecomes maximum. When marginal revenue becomes negative total revenue startsfalling. When AR and MR both are falling, then MR falls at a faster rate thanAR.
4. TR, AR,MR and Elasticity of Demand
Therelationship among AR, MR and elasticity of demand (e) is stated as follows.
MR = AR ( e-1/e)
Therelationship between the AR curve and MR curve depends upon the elasticity ofAR curve (AR = DD = Price).
a. Whenprice elasticity of demand is greater than one, MR is positive and TR isincreasing.
b. Whenprice elasticity of demand is less than one, MR is negative and TR isdecreasing.
c. Whenprice elasticity of demand is equal to one, MR is equal to zero and TR ismaximum and constant.
It is tobe noted that, a the output range of 1 to 5 units, the price elasticity ofdemand is greater than one according to total outlay method. Hence, TR isincreasing and MR is positive.
At the output range of 5 to 6 units, the price elasticity of demand isequal to one.
Hence, TRis maximum and MR equals to zero.
At theoutput range of 6 units to 10 units, the price elasticity of demand is lessthan unity. Hence, TR is decreasing and MR is negative.
Tags : Economics , 11th Economics : Chapter 4 : Cost and Revenue Analysis
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11th Economics : Chapter 4 : Cost and Revenue Analysis : Revenue Analysis | Economics
