Concept of Revenue | Chapter 9 | Class 11 | Economics | Notes |

CONCEPT OF REVENUE | CHAPTER 9 | CLASS XI | ECONOMICS

Revenue

Whatever money a firm receives by selling a commodity is called its revenue.

Revenue=Cost=Profit

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.

TR=AR×Q

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)

MR=∆TR/∆Q

3) Average revenue (AR) – It is the revenue per unit of output sold. It is the same as price of the commodity.

AR=TR/Q

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.

Unit AR TR MR
1 10 10 10
2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10

You may also read Economics and Economy, Central Problem of an Economy, Consumer Equilibrium – Utility Analysis, Consumer Equilibrium – Indifference Curve Analysis, Theory of Demand Change in Demand, Price Elasticity of Demand, Production Function and Returns to a Factor, Concept of CostProducer’s Equilibrium, Theory of Supply, Forms of Market, Market Equilibrium Under Perfect Competition for better output, higher scores and greater grasping of the other chapters.

Relationship Between TR, AR and MR

  • TR increases at constant rate, MR is constant.
  • P=AR=MR

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.

Unit AR TR MR
1 10 10 10
2 9 18 8
3 8 24 6
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 -2

     

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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