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Unit IV Revenue Curvs

The document defines total revenue, average revenue, and marginal revenue. It discusses how total revenue, average revenue, and marginal revenue curves are derived under perfect competition and monopoly. It also examines the relationship between these revenue curves and price elasticity of demand.

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Dipen Dhakal
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72 views5 pages

Unit IV Revenue Curvs

The document defines total revenue, average revenue, and marginal revenue. It discusses how total revenue, average revenue, and marginal revenue curves are derived under perfect competition and monopoly. It also examines the relationship between these revenue curves and price elasticity of demand.

Uploaded by

Dipen Dhakal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Revenue

Total amount of money which is received by the firm by the sale of goods and services
in a particular period of time is known as revenue.
Total Revenue
The amount of money which is received by the firm by the sale of all goods and services
produced in a specific period of time is known as total revenue. Thus,
TR = P× Q
Where,
TR = Total Revenue
P = Per Unit Price of Product
Q = Quantity Produced or sold.
Average Revenue
Average revenue is the per unit price of the commodity. It is obtained dividing total
revenue by the number of unit sold. Thus,
AR = TR/Q
AR = P × Q/Q = P
Where,
AR = Average Revenue
P = Per Unit Price of Product
Q = Quantity Produced or sold.
Marginal Revenue
The increase in total revenue due to the one unit increase in output is called marginal
revenue. Marginal revenue is obtained by dividing the change in total revenue to
change in quantity sold. Thus,

Derivation of Revenue Curve Under Perfect Competition


Perfect competition is a market structue where there exists large number of buyers and
seller sells homogeneous product. In perfect competiton market, the price of the product
is determined by the interaction of demand and supply. The firm is only a price taker.
The price of the product remain the same.
Nature of TR ,AR & MR
 TR is increses as output increses
 It makes an angle of 45*on X-axis
 AR & MR are coincide to each other and parell to X-axis
 Both AR & MR are derived from TR i.e. TR = dTR/dQ & AR = TR/Q
Derivation of Revenue Curve Under Perfect Imperfect Competition/Monopoly
Monopoly is a market structure where there exists only on seller. Firm is a price maker
in this market. The price of the product is determined by the firm itself. Both AR and MR
curves under monopoly market slopes downwards because if the monopoly firm wants
sale more amount of commodity in the market in the market then the fim has to reduce
the price of product. The derivation of AR and MR under TR under monopoly can be
explained with the help of given table and figure.
Nature of TR, AR and MR
 TR increses at increasing rate
 TR increasing at decreasing rate
 TR reaches its maximum points then begins to decline
 AR is downward slopping line/curve
 AR never be zero and negative
 MR is downward slopping line/curve
 MR becomes zero when TR is maximum
 MR becomes negative when TR begins to decline
Relationship between TR ,AR & MR
Case-I: When both AR and MR curves are Straight Line
When both AR and MR curves are downward sloping and straight lines, the MR curve
cuts any perpendicular line to the Y-axis at halfway from the AR curve. This is shown in
the following figure.In AR and MR represent average and marginal revenue curves MR
curve cuts a perpendicular AB drawn to the Y-axis at its middle point AB=BC.

Case-II When both AR and MR Curves are Convex to the Origin


When both AR and MR curves are convex to the origin, the MR curve cuts any
perpendicular line to the Y-axis at more than half-way from the AR curve to the Y-axis.
In Figure, both MR and AR curves are coves to the origin AC is the perpendicular is
drawn from AR to Y-axis.In the figure, AB<BC.
Case-III When both AR and MR Curves are Concave to the Origin
When both AR and MR curves are concave to the origin, the MR cuts any perpendicular
line to the Y-asis at less than halfway form the AR curve. In Figure both MR and AR
curves are concave to the origin All perpendicular is drawn from AR to Y. MR curve cuts
the perpendicular AB at less than mid-point where AB>BC.

Relationship between Price Elasticity and Average Revenue

In order to establish relationship between price elasticity and revenue, we need the help
of following definitions,
Price Elasticity of Demand (EP)
Price elasticity of demand is defined as the proportionate change in quantity demanded
of a commodity due to proportionate change in price. It can be expressed as;
EP = - dQ /dP. P/Q
Or, 1/EP = - dP /dQ. Q/P
Or, Q. dP /dQ = -P/ EP ……………………………………………….. (i)
Marginal Revenue (MR)
Marginal revenue is the change in total revenue due to the additional unit of output sold
by the firm. It can be expressed as;
MR = dTR /dQ ………………………………………………………….. (ii)
Total Revenue (TR)
Total revenue is the total income received by the firm after the sale of output. It can be
expressed as;
TR = P×Q…………………………………………………………… (iii)
From equation (ii)
MR = dTR /dQ
Or, MR = dPQ /dQ
Or, MR = P dQ /dQ + Q dP / dQ (Product Rule of Derivatives)
Or, MR = P + Q dP/dQ
Or, MR = P – P/E P (From Equation i)
∴ MR = P (1- 1/EP)………………………………………………………….. (iv)
On the basis of equation (IV), we conclude that
 If EP>1, MR is positive i.e. TR is increasing
 If EP<1, MR is negative i.e. TR is decreasing
 If EP=1, MR is zero i.e. TR is maximum
The relationship between EP , MR and TR can be presented by the following figure.

The pricing policy of the firm can be presented below;


 If EP >1, it is better for the firm to reduce price in order to increase total
revenue.
 If EP <1, it is better for the firm to increase price in order to increase total
revenue.
 If EP =1, the firm has no incentive to change price because total revenue is
already maximum.

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