CONCEPT OF REVENUE CLASS 11 | CHAPTER 9 |ECONOMICS
Whatever money a firm receives by selling a commodity is called its revenue.
Concept of Total Revenue
1) Total revenue (TR) – It is the sum total of money receipts of a firm from the sale of its total output.
2) Marginal revenue (MR) – It is the change in TR when an additional unit of commodity is sold. MR is rate of TR.
∑MR=TR or MR_n=TR_n-TR_(n-1)
3) Average revenue (AR) – It is the revenue per unit of output sold. It is the same as price of the commodity.
Firm’s Demand Curve
It is a curve showing relationship between price of the product and its quantity demanded in the market. It is also known as AR curve and firm’s price line.
Firm’s Revenue Curve in Different Market
1) Perfectly Competitive Market – Under perfect competition, price remains to be constant. So firm is a price taker. It cannot change the market price. It can sell any quantity at the prevailing price.
Relationship Between TR, AR and MR
- TR increases at constant rate, MR is constant.
2) Monopoly Market and Monopolistic Competitive Market – Under this, price is not constant. A firm can sell any quantity but it has to reduce the price. There is a negative or inverse relationship between, the price of the product and demand for the product. Accordingly, firm’s AR curve and MR curve slopes downward.
Relationship between TR And MR
- TR increases at diminishing rate, MR diminishes.
- When TR maximum, MR is zero
- TR decline, MR negative
- As long as MR positive, TR will increase
Relationship between AR And MR
- When AR is decreasing, MR decreases faster than AR
- MR can be zero or negative, but AR can not be zero or negative
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