1. Revenue

2. 2 Revenues The meaning of revenue: Revenue (or turnover) is the income generated from the sale of output in product markets. There are two main revenue concepts to grasp at this stage: Average Revenue (AR) = Price per unit = total revenue / output Marginal Revenue (MR) = the change in revenue from selling one extra unit of output

3. 3 Total Revenue Total revenue ( TR ) is the total amount of money (or some other good) that a firm receives from the sale of its goods. It the firm practices single pricing rather than price discrimination, TR = total expenditure of the consumer = P x Q

4. 4 Average Revenue Average revenue ( AR ) is the total amount of money(or some other good) that a firm receives from the sale divided by the number of units of goods sold. AR = TR/Q, since TR=P x Q, then AR = P for single pricing practice And since MUV = DD = P, then MUV = DD = P = AR

5. 5 Marginal Revenue Marginal revenue ( MR ) is the change in total revenue resulting from selling an extra unit of goods. MR =  TR/  Q, where  TR = change in TR due to change in Q,  Q = change in Q

6. 6 To find T R from the M R curve For a certain known quantity transacted, the area under the MR and above the horizontal axis is the T R. (I.e. the sum of the Marginal Revenues of all units of goods.) The slope of the TR curve is MR. Why? And, MR is always smaller Price for single pricing arrangement (I.e. MR < P) Why? (Hint MR<AR, AR=P for single pricing)

7. 7 Price Quantity AR MR For a certain known quantity transacted, the area under the MR and above the horizontal axis is the T R. (I.e. the sum of the Marginal Revenues of all units of goods, I.e. area 0ACQ) Also, TR = AR x Q, I.e. area 0PBQ Q P 0 C A B

8. 8 The slope of the TR curve is MR $ Quantity 0 Slope at point E = MR slope =AR TR E The relations between TR, AR and MR

9. 9 Total Revenue, Average Revenue and Marginal Revenue The slope of Marginal revenue ( MR ) is twice the slope of AR. Why? (See next slide) (The relations between TR, AR and MR can also be applied to TUV, AUV and MUV)

10. 10 P, AR, MR Quantity MUV = DD = P = AR Q AR TR Total Revenue = AR curve MR curve

11. 11 P, AR, MR Quantity MUV = DD = P = AR Q AR TR = Total Revenue AR curve MR curve

12. 12 P, AR, MR Quantity MUV = DD = P = AR Q AR = AR curve MR curve

13. 13 Total Revenue, Average Revenue and Marginal Revenue The areas of the 2 triangles must be the same for total revenue should be the same. The two triangles must be the same only if the MR cuts the midpoint of the perpendicular line drawn from the DD to the vertical axis. Hence, the slope of Marginal revenue ( MR ) is twice the slope of AR. The slope of MR is twice the slope of AR MR curve is not the demand curve (the relationship between price and quantity).

14. 14 Price Quantity AR MR A Price -Searcher = Price-Searcher’s Market MR cuts the midpoint of the perpendicular line drawn from the AR to the vertical axis.

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18. 18 The relation between Average revenue and Marginal revenue under perfect competition Average revenue is the revenue per unit of output sold. Average revenue can be calculated by dividing the total revenue by number of units sold. Thus Average revenue is also similar to price at which units are sold. Average revenue will called price only when the different units are sold at a uniform price. In such case Average revenue remains the same at all levels of output sold. But if the price changed on different units sold is different, then the price per unit will not be equal to its average revenue. However, in real market situation commodities are sold at the same price. Average revenue curve of the firm is also called the demand curves of the consumers. Marginal revenue is the net addition to the total revenue by selling one more unit of commodity. It is the revenue of an additional unit sold. Stated algebraically stated, marginal cost is the addition made to total revenue by selling n units of a product instead of (n -1) where n is the given number. Thus suppose a firm earns total revenue of Rs 300 by selling 10 units of the commodity. If the firm increases its sale by one unit or sells 11 units and earns Rs 349, then Rs 19 constitutes its marginal revenue because it represents the addition to the total revenue due to the sale of the 11th unit.

19. 19 The relation between Average revenue and Marginal revenue under perfect competition Marginal revenue can also be defined otherwise. For example the average revenue for 10 numbers of outputs is Rs 30 and when 11th unit is produced Average revenue fall to Rs 29. Thus the total loss for 10 units of output is Rs 10. Thus in order to find the net addition to the total revenue by 11th unit, the loss of revenue is (Rs 10) on previous units should be deducted from the price of Rs 29 at which the 11th unit is sold. Thus MR here is equal to Rs 29 - Rs 10 = Rs 19. Marginal revenue in such a case is less than the price at which the additional unit is sold. MR = Price of the additional unit sold - the loss of revenue on previous units. Therefore, it is concluded that when price (AR) falls marginal revenue becomes less than the price. When marginal revenue falls marginal revenue is less than the average revenue. When average revenue remains the same marginal revenue is equal to average revenue. Marginal revenue is the ratio of change in total revenue to change in total revenue to change in output.

20. 20 The relation between Average revenue and Marginal revenue under imperfect competition Under all firms of imperfect competition i.e. monopolistic competition, oligopoly and monopoly, average revenue curve facing in individual firm slopes downward. In imperfect competition a firm Increase its sale by reducing price or decreases sale by increasing price. Supposing the total revenue of selling 10 units of commodity is 120. Thus average revenue per unit will be Rs 12. If total revenue is 220 by selling 20 units of commodity, the average revenue becomes Rs 11. Thus average revenue falls with increase in the units of commodity sold. The relationship between average revenue marginal revenue and total revenue is shown in the following table.