Theory of Revenue

THEORY OF REVENUE
Revenue is the amount that a firm receives from the sale of the output.
ACCORDING TO PROF. DOOLEY
“The Revenue of a firm is its sales receipts or income.”
There are three concepts of revenue which are as follows:
THEORY OF REVENUE INCLUDES FOLLOWING TYPES OF

REVENUES
TOTAL REVENUE
TR is the amount of money that a firm receives for the offer of goods and services
in the market. A firm’s total revenue can be calculated as the quantity of goods
sold multiplied by the price. The TR includes the product of the quantity sold and
the price.
TR = Q x P
Where,
TR – Total Revenue
Q – Quantity of sale (units sold)
P – Price per unit of output

AVERAGE REVENUE
AR is used as price in a perfectly competitive market. This can be found by the

ratio of the firm’s total revenue and the number of goods sold.
AR =TR/Q
Where,
AR – Average Revenue
TR – Total Revenue
Q – Total units sold
MARGINAL REVENUE
MR refers to the extra money received by selling one more additional unit of the
commodity. It is an addition to the total revenue of a firm as new additional units
are sold. By selling an additional unit, a firm earns additional revenue that adds to
the total revenue and this addition to revenue is called MR.
It is calculated as:
MR = TRn – TRn-1
Or
MR =ΔTR/ΔQ
Where,
• MR – Marginal Revenue
• ΔTR – Change in the Total revenue
• ΔQ – Change in the units sold
• TRn – Total Revenue of n units
• TRn-1 – Total Revenue of n-1 units
RELATIONSHIP BETWEEN TR, AR AND MR

The relationship between TR, AR and MR can be well explained with the help of
table:
The above table shows with the increase in the TR; AR and MR both decreases
but rate of decrease in MR is more than the rate of decrease in AR.
Then, there comes a point where the TR becomes maximum and constant i.e. 30.
At this point the AR is still falling but MR becomes Zero.
After that, the TR starts diminishing and then MR becomes negative and AR keeps
on falling.
The relationship can also be shown with the help of diagram:
In the above diagram, AR, TR and MR curve is shown at OY axis and Output is
shown at OX axis. TR curve is increasing initially then becomes maximum and
starts falling. AR curve is falling continuously. MR curve is initially falling then
becomes zero and negative afterwards.
The relationship among TR, AR and MR can be summarized as follows:
(i)TR increases at a diminishing rate with increase in the units of output, since
more units of the commodity can only be sold at a lower price, such that MR is
positive and is downward sloping.
(ii) At the point when TR is maximum MR happens to equal to zero.
(iii) MR becomes negative, when TR decreases with increase in the units of output.
(iv) MR falls with the fall in AR, but, the rate of decrease in MR is much higher
than that in AR.
(v) MR may be positive, negative or zero, but AR is always positive (since

negative price is illogical)
The above results holds true in case of all forms of imperfect competition that is,
monopoly, duopoly, oligopoly, monopolistic competition, etc. Under imperfect
competition, as a firm lowers the price, the quantity demanded goes up and
average revenue curve slopes downward as a result.
REVENUE CURVE UNDER PERFECT MARKET

CONDITION
REVENUE CURVES UNDER PERFECT COMPETITION
A Perfect Competition market is that type of market in which the number of

buyers and sellers is very large, all are engaged in buying and selling a
homogeneous product without any artificial restrictions and possessing perfect
knowledge of the market at a time.
Thus, in perfect competition an individual firm is price taker, because the price is
determined by the collective forces of market demand and supply which are not
influenced by the individual. When price is the same for all units of a commodity,
naturally AR (Price) will be equal to MR i.e., AR = MR.
The schedule is shown in the table below:
THEORY OF REVENUE
In table it is found that as output increases, AR remains the same i.e. Rs. 5. TR
increases but at a constant rate. MR is also constant i.e. Rs. 5 and is equal to AR.
Thus
TR = AR x Q
Also TR = MR x Q [Since AR = MR]
This can also be shown with the help of diagram:
In above figure, on the X-axis, quantity is taken whereas on Y-axis, there is

revenue. At price OP, the seller can sell any amount of the commodity. In this case
the AR curve is the horizontal line. The MR curve coincides with the AR.
It is because additional units are sold at the same price as before. In that case AR =
MR. A noteworthy point is that OP price is determined by demand and supply of
industry.
REVENUE CURVES UNDER MONOPOLY
Monopoly refers to a market situation in which there is only one seller of a

commodity.
There are no close substitutes for the commodity it produces and there are barriers
to entry. The single producer may be in the form of individual owner or a single
partnership or a joint stock company. In other words, under monopoly there is no
difference between firm and industry.
Monopoly is opposite to perfect competition. Under monopoly both AR and MR

curves slope downward. It indicates that to sell more units of a commodity, the
monopolist will have to lower the price. This can be shown with the help of
following table and diagram:
In case of pure monopoly, AR and MR curves slope downward steeply. In this
situation, a producer is so powerful that by selling his output at different prices, he
can make the consumer spend his income on the concerned commodity. It implies
that TR of the monopolist will remain same whatever may be the price. Area
below each point of AR curve and MR curve will be equal to each other. The
curves are less than perfectly elastic.
REVENUE CURVES UNDER MONOPOLISTIC COMPETITION
Monopolistic competition is a market form where there are large number of buyers
and sellers selling the heterogeneous i.e. wide variety of products and incurring
huge selling costs.
The revenue curves under the monopolistic competition are more than perfectly
elastic.
This can be explained with the help of following table and diagram:
In monopolistic competition, there exists the free price policy of a commodity of a
firm which means the price of the commodity remains under the control of the
firm. So to increase the sale of units, price has to be reduced. Because of more
price elasticity of demand, AR and MR slope downward from left to right but both
are with less sharpness of slope and AR and MR are nearer to each other.

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THEORY OF REVENUE

ACCORDING TO PROF. DOOLEY

“The Revenue of a firm is its sales receipts or income.”

There are three concepts of revenue which are as follows:

THEORY OF REVENUE INCLUDES FOLLOWING TYPES OF

Q – Quantity of sale (units sold)

P – Price per unit of output

AR is used as price in a perfectly competitive market. This can be found by the

Q – Total units sold

RELATIONSHIP BETWEEN TR, AR AND MR

The relationship can also be shown with the help of diagram:

(ii) At the point when TR is maximum MR happens to equal to zero.

(v) MR may be positive, negative or zero, but AR is always positive (since

REVENUE CURVE UNDER PERFECT MARKET

A Perfect Competition market is that type of market in which the number of

The schedule is shown in the table below:

Also TR = MR x Q [Since AR = MR]

This can also be shown with the help of diagram:

In above figure, on the X-axis, quantity is taken whereas on Y-axis, there is

REVENUE CURVES UNDER MONOPOLY

Monopoly refers to a market situation in which there is only one seller of a

Monopoly is opposite to perfect competition. Under monopoly both AR and MR

REVENUE CURVES UNDER MONOPOLISTIC COMPETITION

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